The history of corporate merger failure
Author catalogues the M&A Hall of Shame
By Thom Calandra, CBS.MarketWatch.com
Last Update: 1:40 PM ET March 20, 2002
Tom Taulli, a prolific financial author, has been researching his latest book, all about mergers and acquisitions, for more than a year now. Executives at Hewlett-Packard and Compaq Computer will pick up a few integration tips for the price of a hardcover.
Academic and industry studies show the science of M&A is more an art. One of the most cited studies comes from consultant McKinsey & Co., which found 61 percent of acquisitions were failures in terms of rate of return to investors. "Instead of seeing synergies of 2+2 = 6, you may see odd things like 2 + 2 = negative 6," says Taulli.
Another McKinsey study shows a focused M&A policy "can be a major driver of shareholder value," Taulli says. "But this usually means a buyer is not looking for blockbuster deals, but instead smaller transactions. Typically, a purchase price would be less than 1 percent of the acquirer's market capitalization."
Taulli, living in California, has catalogued an M&A Hall of Shame ahead of the publication of his "The Complete M&A Handbook: The Ultimate Guide to Buying, Selling, Merging, or Valuing a Business for Maximum Return."
First off, deal maker Henry Silverman, the Blackstone Group investment banker who bought hotel chains Ramada and Howard Johnson, named HFS at the time, in 1990. "He thought he could create steady cash flows from well known brands by using a franchise model," recalls Taulli. Silverman proceeded to buy Super 8 Motels and the real estate firm Century 21.
By the late 1990s, "HFS was a Wall Street darling," says Taulli. In 1997, Silverman merged the company with CUC International, a marketer of discount membership clubs. The company later became Cendant (CD: news, chart, profile). "But due diligence did not uncover the fact that CUC was faking a substantial amount of its revenues. When the accounting scandal broke, so did the stock of Cendant," the author said.
Cendant shares lost $14 billion of value in a day. Two former executives, Walter Forbes and E. Kirk Shelton, face criminal charges that include conspiracy, securities fraud, wire fraud and mail fraud. The case is considered the largest financial fraud, to date, to be pursued by the U.S. Securities & Exchange Commission.
Taulli, whose books include "Investing in IPOs" (Bloomberg Press) and "Tapping into Wireless" (McGraw-Hill) with Dave Mock, says many failed mergers or billion-dollar acquisitions quickly fade from public awareness, whether they succeed or melt down.
Take Mattel (MAT: news, chart, profile), the toy company. "A former cosmetics sales lady, Jill Barad would ascend to the CEO of Mattel in her mid-40s," says Taulli. "She worked wonders in rejuvenating the Barbie brand. Unfortunately, her biggest mistake was her purchase of the educational software firm, The Learning Company, for $3.5 billion in 1999."
Wall Street's shameless bankers and brokers at the time believed the deal made sense. "Mattel had incredible brands and The Learning Company could digitize these brands. But integrating a software company into a traditional toy company was too difficult for management," Taulli remembers. "The Learning Company was losing $1.5 million per day and Mattel sold the company for basically no down payment in late 2000. The buyer was a small M&A firm, Gores Technology Group, which brought the software developer "to break-even in 75 days."
Anthony Gambacorta, a Pennsylvania fund manager of about $100 million in assets, points out the computer company Compaq is itself "a failed merger between Compaq and Digital Equipment. The plan to compete against IBM, end to end, failed."
Gambacorta, chief investment officer of Preswick Capital Management, has been around long enough to remember Sperry/Burroughs merging to form Unisys. "The story then was based on the theory that two mature tech companies could merge to compete with IBM and Digital Equipment in the mini-computer and mainframe business," he says.
Hewlett Packard (HWP: news, chart, profile), of course, bought Apollo Computer "just as the computer workstation market began to slow down and shake out," Gambacorta says. "Or Silicon Graphics (SGI: news, chart, profile) and Cray Research? Cray was once the darling of the supercomputer market, but the combination of the two hurt Silicon Graphics considerably."
Gambacorta says Hewlett Packard should "take the profits from its printer business and redirect cash flows to segments that may provide superior returns, while pruning under-performing businesses. If management is occupied cutting costs and integrating worldwide distribution systems, then invention will take a back seat."
Taulli, in his research of good and bad mergers and corporate purchases, said executives' egos often color transactions. "A CEO may do a deal simply to get headlines and make the company bigger. Or, an acquirer may fall in love with a technology. Or, an acquirer may pay too much," the author said Wednesday.
Which leads us, finally, to Ray Noorda, at one time the chieftain of networking software maker Novell (NOVL: news, chart, profile). "Microsoft competitors were scrambling to stop Bill Gates, and software executives thought mega-M&A was the solution. More than anything, Noorda wanted to destroy Gates. He called Bill 'that little squirt.' "
Noorda went and purchased WordPerfect, a word processing program, for $1.4 billion. He also bought the Quattro Pro spreadsheet for $145 million. With these, Noorda figured he could compete with Microsoft's Office suite of desktop software applications. "But there were major problems. WordPerfect was slow to transition to Windows," says Taulli. "Also, integrating these disparate assets proved difficult. Within 18 months of the acquisitions, Novell had to unload WordPerfect and Quattro Pro and lost about $1.2 billion."
Most of these examples are in the stock market, where investors' stakes are at risk. Taulli says ordinary shareholders, like the ones in the Hewlett Packard-Compaq proxy battle, should get very nervous if a company is "doing a blockbuster deal that represents a substantial part of its market cap, say 30 percent or more. Also, beware if the stock falls on the news of the announcement or if the acquisition does not seem to fit with the strategic vision of the company or if the company is paying a significant premium."
Taulli is not entirely skeptical of large deals. Cheaper prices for technology assets make some transactions easier to digest today than two years ago. "Look at Nortel. In the late 1990s, the company went on an acquisitions binge. But with a sagging stock price, impatient investors and a falling credit rating, the company is now being forced to divest assets to pare down debt. The company plans to divest real estate, fixed wireless assets and minority investments. There will be smart dealmakers who can make these assets work."
Taulli's "M&A" guide will be published by Prima Publishing, an imprint of Random House, later this month. See a list of Taulli's work. |
