March 13, 2004

Inorganic VS Organic Growth

This article on M&A sounds about right.
Most studies of mergers and acquisitions by consultants and academics come to the same conclusion: Mergers tend to destroy value, not create it. Work by McKinsey & Co. shows that 65% to 70% of deals fail to enhance shareholder value. Consultant Booz Allen Hamilton estimated that 47% of deals didn't meet the objectives laid out by management in the merger announcement. A recent study by economists Sara B. Moeller of Southern Methodist University, Frederick P. Schlingemann of the University of Pittsburgh, and Rene M. Stulz of Ohio State University calculates that acquiring outfit's shareholders lost $216 billion from 1991 to 2001

Still, why do so many CEOs persist in dealmaking if the long-term track record for takeovers is so poor for owners? Two arguments stand out in the literature, and neither puts CEOs in a kindly light. Richard Roll, a finance professor at UCLA, advanced in 1986 the "Hubris Hypothesis of Corporate Takeovers." In other words, all CEOs think they were born and raised in humorist and broadcaster Garrison Keillor's fictional Lake Woebegon, where all the children are above average.

CEOs believe they can beat the odds. Sure, two-thirds of mergers don't do well by owners, but they all see themselves in the one-third camp that beats the takeover odds.
This next part sounds like it was pulled verbatim from Deming's classic "Out of the Crisis"
In addition, it's a lot more fun to get into a high-stakes takeover battle surrounded by legions of investment bankers, lawyers, consultants, and the media than it is to focus on improving the flow of product through a manufacturing plant or overhauling an inventory management system. We've also learned in recent years just how much CEO compensation packages reward management for overseeing a bigger company -- even though the owners are left holding the proverbial financial bag.
That may be a little extreme. If a Big Company has a strong operating culture that also cherishes new ideas and positive change, then the "plug & play" acquisition model works pretty well.