Managing revolution: Off with the old, on with the new - Enthusiasm for the big numbers and strategies of the mega-mergers hides the fact that too often they bring little advantage to either party

Managing revolution: Off with the old, on with the new - Enthusiasm for the big numbers and strategies of the mega-mergers hides the fact that too often they bring little advantage to either party - Hundreds of billions (of pounds or dollars) are being sl

by ROBERT HELLER, was founding editor of Management Today
Last Updated: 31 Aug 2010

Hundreds of billions (of pounds or dollars) are being slung about in cyberspace, media and telecoms as the giants battle for pole position in an acquisition race of uncertain destination. And some of the mega-mega-mergers will end up heading nowhere.

That can be said with total confidence for two reasons: first, a large proportion of all mergers end in failure, relative or absolute; and second, the chances of failure are inevitably increased when price is no object.

The death-defying P/E ratios of these businesses have encouraged boards to throw their calculators out of the window, but their companies face a real risk of exiting by the same route.

Cyberspace has not suspended the rules of 'economic value added'. If the profits gained by an acquisition do not exceed the cost of the capital spent on the purchase, the shares and their holders inevitably suffer.

The cost of equity capital for internet stars is anybody's guess, but it still exists and post-acquisition losses will devour the capital of the highest of flyers.

The art supremo Lord Duveen advised American tycoons that if they were buying the priceless (ie, Old Masters from Duveen), they were getting it cheap. But Time Warner is not priceless and whether AOL has got it cheap, or crucifyingly dear, will emerge only over time - whatever the mostly admiring contemporary commentators may say.

Unlike investors, pundits are too easily impressed by grand numbers (like the original dollars 156 billion for Time Warner) and grandiose strategies. All hands applauded Sony when it acquired Columbia Pictures in 1989 because it was deemed that marriages between content and its carriers are heaven-made. But Sony was taken to the Hollywood cleaners; owning content brought it no competitive advantage.

Undeterred, Business Week has proclaimed that 'with one stunning stroke, AOL and Time Warner create a colossus and redefine the future'. Yet two years ago, the magazine announced with equal enthusiasm that 'the Compaq-Digital deal will shake up everything'. Inside, the magazine - which is exceptionally well-informed about IT - said that the shake-up would 'reach far beyond the PC crowd and into every corner of the dollars 700 billion computer world'.

The shake-up, as it turned out, was confined to Compaq, as the ill-timed union with Digital helped only to undermine the Texan company's profits and cost chief executive Eckhard Pfeiffer his job. The doomed deal had a record-breaking dollars 8.7 billion price-tag, which now seems positively peanuts, but much was wasted. Everybody knew that Digital had badly mishandled the transition from mini-computers to PCs and the internet, yet Compaq was confident that it could turn the ugly duckling into a swan. It couldn't.

Time Warner has handled the transition to e-business even more ineptly than Digital. Earthbound managers, reared on music, radio, TV, news and magazines, have proved unable to launch profitable operations using the new digital technology. The e-proposition is that the old cannot manage the new. But neither can the opposite be safely assumed - that the new will successfully manage the old - meaning, in this case, that AOL will be master of giant businesses that it does not understand.

Revisiting these past mergers is a valuable antidote to gung-ho enthusiasm about current super-deals, although the AOL masterstroke attracted more reservations than most. When Telefonica spends dollars 21 billion for full control of its Latin American assets, or Vodafone makes a great grab for Mannesmann, the logic gets the full benefit of the doubt - even though telecoms players face the certainty of rapidly declining prices and increasing competition.

Doubling or trebling your bets doesn't seem the wisest course in such circumstances, but at least (and least may prove to be very little) these players are buying into businesses they know and which are genuinely complementary. Unions between cyberspace stars and mundane businesses face double jeopardy: the e-heroes can bring little to the feast on earth, and the feast may be going stale.

That is certainly possible with the music business, the jewel in Time Warner's cash-flow. According to Andy Kessler, writing in the Wall Street Journal, the cash cow is more than threatened by downloading to the MP3 digital format, which will wipe out the existing music distribution system.

'New empires will be built as old ones are destroyed,' says Kessler - his point is that AOL could have created a new empire all by itself, without the need to acquire Time Warner. Instead, it will be striving (and possibly struggling) to protect the latter's profits.

The lesson is general. The e-revolutionary battle-cry is 'off with the old, on with the new'. The e-heroes have quite enough problems in sustaining their own growth rates and achieving profits that justify their weird evaluations. Buying other people's problems for billions looks like bad business.

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