So here, in a nutshell, is what we've learned from reading deal coverage of late: M&A is back! Lots of companies, including many we've actually heard of -- Dell! Disney! Kraft! Xerox! -- have announced deals over the past few weeks. This is good. It means CEOs are feeling more confident about the economy. They're spending money. The market is rising. We're recovering. Yay! But it's also bad. Egged on by Svengali-like investment bankers, these companies are likely to keep shopping and spending. They'll overpay for acquisitions, get too big, go bust. Why? Because M&A is basically bad. Very, very bad.
OK, maybe we're exaggerating, but if so, only by a bit. Just look at the headlines. "In Flurry of Big Merger Deals, Signs of Restored Confidence" trilled The New York Times on page A1 on Sept. 29. That same day, The Wall Street Journal, on its Money & Investing front, announced: "Let's Make a Deal: Words to Rally By." Funny. Only four days and two deals earlier (Abbot Laboratories-Solvay SA and Xerox Corp.-Affiliated Computer Services Inc.), a headline in the Financial Times told readers that "Rising Confidence Fails to Bolster M&A Activity."
Still, few media outlets shared that restrained view. Indeed, most seemed to accept, based on scant evidence, that a giant M&A wave was breaking. And they set out to warn us of the damage that will wreak.
Take The Atlantic Business Channel and a blog by Daniel Indiviglio, "Is a Coming M&A Boom Good News?" posted on Sept. 21. As the headline implies, Indiviglio accepts that an "M&A Boom" is on its way. His evidence? An article on Bloomberg arguing that because companies have record cash on their books and the market is valuing companies relatively cheaply, the stage is set for an M&A surge. Well, maybe. But even if cash is king, are companies going to keep buying if the market remains volatile and rising? Indiviglio, for one, is undeterred. He expects not only a surge, but a "truly unprecedented amount of M&A activity." That's a tall order, considering that $4.83 trillion worth of deals were announced in 2007 and $3.9 trillion in 2006.
Indiviglio is sure "investment bankers across Manhattan are drooling over the news" of such merger madness but warns that readers should definitely not.
To make his case, he points to David Weidner's column on The Wall Street Journal's Web site, "Wall Street's Biggest Con Is M&A Advice." In that piece, Weidner argues that M&A is a "mostly empty exercise" that CEOs pursue at the urging of "smooth-talking investment bankers whispering in the ears and financial incentives awaiting them." He implies that Bruce Wasserstein, head of Lazard (and chairman of The Deal LLC), pushed Kraft Foods Inc.'s Irene Rosenfeld into bidding for Cadbury plc and Time Warner Inc.'s Gerald Levin into merging with America Online Inc. "The result was a $181 billion debacle widely acknowledged to be among the worst deals in American business," Weidner intones.
Indiviglio believes Weidner makes "a pretty strong argument that most mergers are ill-fated, or at least won't come anywhere near the expectations the firm involved had." Really? All we saw was a quick mention of everyone's favorite deal from hell, AOL-Time Warner, and a flick at an oft-quoted (and oft-debunked) study from Hay Group that found that many European mergers failed to deliver on their promises. But that's enough for Indiviglio, who isn't just worried about what bad deals mean for companies or shareholders, "but the broader economic consequences," including too-big-too-fail and the complexity of corporations: "Maybe if the auto companies had been smaller, and focused more on specific niches, certain ones would have been more successful than others, and some would have failed, but others survived and flourished," he writes. "There's something to be said for specialization."
True enough. But there's also something to be said for the growth, innovation and strength that M&A can create. Like many of the stories that argue against M&A, Weidner's and Indiviglio's lump all deals together, whether smaller, strategic purchases made in the beginning of a deal cycle or big-ticket, transformative transactions made as the market is about to top out. If we really are at the start of a merger wave — this remains to be seen — there's nothing wrong with debating whether M&A is good or bad. But it would be nice if that argument went beyond the failure of AOL-Time Warner and the simplistic notion that bankers made them do it.
Yvette Kantrow is executive editor of The Deal.