Questionable tactic

With the economy and stock markets in the doldrums, some corporations are searching for remedies.

A few believe that mergers-acquisitions will change the outlook. However, history reveals that is a very questionable tactic. Innumerable examples abound that should give businesses pause.

The problems arise because of the uncertainty about the price paid for the union of businesses and the difficulties of combining two different organizations.

What distinguishes the bids from those that fail is increased when one makes an offer above the target’s 52-week high. The bidder often is carried away by enthusiasm. Too, companies seem to ignore the difficulties of joining two different managements.

Thus, for example, in the United States McDonnell Aircraft Corporation, a leading manufacturer of fighter aircrafts, had a superb track of record growth that rivalled the performance of so-called growth companies.

To supplement the business, management decided to take over the Douglas Aircraft Company, a passenger aircraft maker that was having difficulties earning a profit. 

McDonnell believed that it could provide a clear path to more profitable results, and too, one that would hedge if military spending were to be reduced. On both counts the merger failed so McDonnell opted to merge with Boeing Company, but that led to the loss of McDonnell’s identity.  Boeing Company has at best generated a cyclical performance.

Several years ago Xerox Corporation believed the copying business was not advancing significantly so it made a bid for a high-tech company, Scientific Data Systems. To accomplish that merger Xerox pushed the price to SDS from $12 per share to an astounding $112 per share. It also failed to examine thoroughly that company’s long-term prospects. In the year following Xerox reported a very poor earnings record that it blamed on the dismal record of its newly acquired subsidiary, Scientific Data Systems.

Air Canada decided it would be sensible to merge with CP Air.  That company already was a combination of Pacific Western, Provincial Transcanada, and Nordair.

While the merger appeared to make sense, the takeover was in the throw of trying to organize its other corporations.  The proposed merger by Air Canada consumed years of controversy and management infighting. It took several years to straighten out this assembly of companies.

It is not surprising that this year the proposal by CP Rail to amalgamate with the U.S. Norfolk and Southern Railway failed.

Ling Temco Vought’s share commanded a high-price multiple, so the company purchased several small organizations that were selling at a lower price-earnings multiple. Management never was able to integrate the many diverse operations and that company went bankrupt.

Improving present operations is far simpler and much more profitable in the long run.

Clashing management styles, infighting and varied businesses often hamper mergers. 



Bruce Whitestone