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 There's an old journalistic ritual that emerges just about every cycle, when things have really gone bad: It's the fault of mergers and acquisitions. One of the oft-repeated truisms of that ritual is to chant, as John Plender does in a column in Monday's Financial Times, "that countless academic studies have shown [M&A] to be generally value destroying for acquiring shareholders." I particularly like that "countless," which suggests that Plender hasn't been able to completely survey the literature. In fact, the literature is a lot more nuanced, the subject more complex and, like a lot of finance, inherently cyclical in nature than he suggests. Big-ticket, top-of-the-market M&A seems to pose a far greater risk to value than less-expensive deals done in more temperate stretches of the cycle. And measuring all this -- how long should the duration be, for instance? -- is not for the faint of heart.
Plender's real target here is bank M&A, which he argues needs to be more tightly controlled and regulated. He doesn't exactly want to ban all M&A, though early on in the column his condemnation is so broad you do get that sense. Instead, in the very last paragraph he admits that while M&A is a very high risk activity, "that is not to say that good takeovers are a chimera." He cites Royal Bank of Scotland plc's (NYSE:RBS) Fred Goodwin's takeover of NatWest, then yanks the rug out from under the demon Goodwin by suggesting NatWest was so successful that hubris set in and led to the disastrous ABN Amro Bank NV deal. So we get to the same place by a different route. Plender's right about one thing: M&A is a risky activity and deals can, and do, go wrong. But is it all so simple? After all, the deals he mentions -- Bank of America Corp. (NYSE:BAC) and Merrill Lynch & Co., Lloyds TSB Bank plc (NYSE:LYG) and HBOS, and RBS and ABN Amro -- were transactions essentially sucked down the drain by the financial crisis. Their "failure" came because of an inability to predict that the situation would deteriorate, which is a failure shared by many. In a better climate, or even a more stable climate, these deals might well have looked pretty good. Moreover, the Lloyds and BofA acquisitions were made with the active encouragement of regulators. From a shareholder perspective, both institutions would have been better off tending their own garden. But from a public policy perspective, both were wading into M&A to absorb institutions that needed to be shut down or bought. As The Wall Street Journal reports Monday, the Federal Deposit Insurance Corp. is sitting on lots of failed banks because it can't find bank buyers. Then there's the larger question of bank M&A beyond a crisis period like this. Bank consolidation has been going on in the U.S. and Europe for years now, encouraged by regulators (Plender's notion that M&A is a part of the "Anglo-American model" might once have been true, but that practice has now become so ubiquitous that referring to the model feels anachronistic). The preponderance of these deals has been reasonably successful. Examine the impressive record over a decade or so of the construction of big banks like Wells Fargo & Co. (NYSE:WFC), BofA, Wachovia, Bank One. Even Citigroup Inc. (NYSE:C), which may be unmanageable, had some very good years after Sandy Weil blew in and some truly disastrous years when John Reed was running the pre-Travelers' institution. It is true that too-big-to-fail poses significant regulatory challenges, but you can't condemn managers and boards from seeking growth in a pro-growth regulatory and market era. After all, what is the choice for a publicly traded banking company in a period of intense consolidation? Buy or be bought. How do a CEO and board choose one of those two paths? They sell if they think they'll never make it alone; they buy if they've got a prayer. Perhaps that strategic debate should be conducted more rigorously, particularly with shareholders. But the terms of the debate always hinge on the view of the future. How many shareholders want a CEO who is so defeatist? How many shareholders of BofA were thrilled to see the bank gobbling up its rivals? Allow one final point, which needs to be asked every time this notion of M&A as a plague gets pitched: Imagine a world without M&A, or one with severely circumscribed M&A. True, it might well be a safer and sounder world, at least for awhile. But in a commodity business like banking, it's also a recipe for stagnating earnings and can, in turn, provoke the kind of reckless risk-taking required to escape the box that characterized the S&L problem in the U.S. Shareholders after all want earnings and share appreciation; and often enough in banking the only way to that is M&A. Besides, the ban on M&A better be universal, or you'll create larger, predatory banks based in less-constrained countries that can dominate, replicating the U.S. consolidation wave driven by banks from states that more quickly deregulated, like North Carolina and Ohio. Banning foreign banks from buying domestic banks would, in turn, create low-growth, if safe, economies: a stagnant pond. There's no easy answer here to the omnipresent tradeoff between safety and efficiency. Lean too far one way, by restricting M&A in a significant way, and you get stagnation. Lean too far the other, by encouraging endless consolidation, and you get too much risk. All of which takes us back to sensible prudential regulation, emphasis on the prudential. - Robert Teitelman See Plender's column in the FT See story from the Wall Street Journal Robert Teitelman is the editor in chief of The Deal.
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