Call it global warming; few things are hotter in this era of international trade than the business of mergers and acquisitions.
Over the past several months, Canada’s booming resource sector in particular has succumbed to the prevailing wisdom that “Big is beautiful.” Abitibi-Price and Stone-Consolidated are on the verge of a $4.1-billion merger that will create the world’s largest newsprint maker. Another pulp-and-paper maker, Avenor, has tabled a $2.75-billion bid for Repap Enterprises.
In the oilpatch, where more than $10 billion worth of M and A deals were completed last year alone, Gulf Canada Resources has just spent $1.1 billion to acquire Clyde Petroleum PLC. Talisman Energy is bidding $1.7 billion to buy Wascana Energy. And Northstar Energy just bagged Morrison Petroleums in a $693-million transaction.
Many of these companies are themselves products of past mergers. And as they continue to bulk up, the ultimate impact of this prolonged period of consolidation becomes more uncertain. On the golf course or on paper, a corporate combination may look like a snap. But while it can be argued that in mature markets it makes sense to buy assets, reserves or technology rather than starting from scratch, there are a host of hidden factors that can distort the real costs of a megadeal.
One of the most obvious dangers is that senior managers can become absorbed by the courtship and the subsequent challenge of joining two companies. Aside from the predictable headaches of integrating computer systems, eliminating duplication, reassuring customers and suppliers, it can take years to seamlessly blend distinct corporate cultures.
That task is further complicated if the companies in question have a tradition of rivalry. In the ultra-competitive brokerage industry, for example, the merger of Nesbitt Thomson, owned by the Bank of Montreal with independent Burns Fry entailed a masterful grafting operation. Across the street,
the Royal Bank is still grappling with the integration of its own traders with the more austere troops at RBC Dominion Securities. The Royal’s acquisition of family-owned Richardson Greenshields late last year has further complicated the process.
Meanwhile, at Canadian Airlines International, a company formed by the merger of more than half a dozen different airlines, employees often identify themselves as veterans of Wardair or Canadian Pacific Airlines more than a decade after those acquisitions.
Mergers and acquisitions can pose other costly problems. A study at Texas A&M University shows that corporations with acquisition plans spend less on research and development. Mergers and acquisitions usually create debt, and that siphons cash away from project spending. It also tends to enforce short-term financial goals, rather than longer-term strategic ones.
When it comes to entrepreneurial firms or technology ventures, corporate marriages are especially tricky. There’s always the risk that imposing a different culture will quash the innovative spirit that made the target company attractive in the first place. Apple Computer declined rapidly in the late 1980s after founder/guru Steven Jobs was banished by new management; it remains to be seen whether his return late last year will reverse the slide. Novell’s purchase of Word Perfect—which has since passed into the hands of Ottawa-based Corel Corp.—and Borland’s acquisition of Ashton Tate are prime examples of thwarted attempts to buy turnkey innovation.
There are also hidden costs for investors when companies merge or acquire. A study by consultants at Mercer Management reveals that over the past 10 years, 57 per cent of North American companies that undertook M and A deals valued at $675 million or more failed to generate shareholder returns equal to their industry average.
In short, big may be beautiful—but it’s not always best.
There are hidden costs for investors when companies merge or embark on a takeover spree
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