Are Companies Too Eager To Do Big Mergers?

from the big-egos-big-mergers dept

With Microsoft and Yahoo! back at the negotiating table, Megan McArdle suggests that corporate CEOs are too trigger-happy when it comes to big mergers. She says there are a few situations where mergers really make sense, including when there are significant economies of scale or cost savings. A big part of the original rationale for the Microsoft-Yahoo! merger was that it would give them the scale to compete effectively with Google in the search advertising market. But against these speculative advantages, it has to be remembered that Microsoft would have have had to pay a hefty premium on a firm's market value, cover the costs of the merger process, worry about corporate culture clashes, and absorb the reduced productivity as employees of both companies were focusing on the details of integration rather than developing new products. The deal would have had to produce some amazing benefits to offset those costs.

Indeed, this kind of basic math suggests that big mergers should be pretty rare. But in practice, they seem to get proposed pretty often. In a lot of cases merger proposals seem to be driven by empire building and excessive optimism on the part of the acquiring CEO. CEOs tend to have high opinions of themselves and their managerial skills, and they like the idea of running a larger, more prominent company. And with deals of this size, it's almost always possible to tell a plausible story of how things will turn out well. The AOL Time Warner merger is the classic example of this, it was heralded as a strategic master-stroke, but it created a lot of problems and the promised synergies never materialized. Megan suggests that Microsoft's new strategy of pursuing a strategic partnership rather than an outright acquisition makes more sense. They can probably get most of what they could have gotten from a merger without all the baggage that comes with a full-blown acquisition.

Filed Under: big companies, deals, mergers
Companies: microsoft, yahoo

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  1. identicon
    Snidely, 24 May 2008 @ 5:57am

    CEO payouts are huge

    Eldakka (#3) is completely correct. CEOs jump at the chnace to merge with anyone to get a huge payout. When Sprint and Nextel merged, each CEO got a $20 million package for the successful completion of the merger in addition to massive stock benefits. Now that SN has run aground and is hemmoraging subscribers, you'd think the company wouls sue the former CEOs to reclaim those awards.

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