GM, Fiat, Verizon and MCI: Both Sides of the Merger Coin
As a business analyst, I wonder sometimes if CEOs ever bother to read publications like the Wall Street Journal, Harvard Business Review or even the Economist. If they did, they'd know that most mergers fail to produce the results expected and that some can be downright disasters the continuing fallout of the Hewlett-Packard acquisition of Compaq Computers comes to mind immediately).
The latest example of how too much zeal for mergers can result in a terrible backlash is General Motors severing ties with the troubled Italian car manufacturer Fiat. And we're not talking about an amicable divorce, either. According to The BBC General Motors is paying $2 billion cash within the next 90 days to avoid being stuck buying Fiat by 2009.
When you look at the Fiat numbers and consider just how incredibly diversified (read "spread too thin") General Motors already is, I think you can retrospectively make the case that the ownership swap between the two firms was just daft and didn't exhibit any good business sense.
Consider Fiat's Financial Results: Fiat earned EUR 26b in 1997 from car sales and then watched as sales gradually decayed: 25b in 2000, 24b in 2001, 22b in 2002 and only 20b in 2003. There's not a sector of Fiat that hasn't declined in the last decade, some dramatically so. Overall earnings paint an ugly picture: EUR 58b in 2001, 55b in 2002 and only 47b in 2003.
Meanwhile, the excitement over mergers is continuing unabated, from those CEOs who aren't paying attention, were too busy partying during their MBA "M&A financial analysis" courses, and are deep in denial of what the GM/Fiat situation and HP/Compaq show: big ticket mergers just aren't a very good deal.
Certainly Ivan G. Seidenberg, Chairman and Chief Executive Officer of Verizon isn't paying attention, that's for sure. How else can we explain their offer to buy MCI Telecom for $5.3 billion today? A few years ago acquisitions of multiple billion were shocking news, but nowadays there's so much churn in the industry that I can't even bring myself to say "the amazing amount of" or "the remarkable amount of". $5.3 billion. Just another day.
There's great irony in watching the evolution of the telecommunications industry, actually. The breakup of AT&T in 1984 created a dynamic telecom ecosystem that allowed the birth and growth of hundreds of nimble companies. AT&T even liked it: in 1995 it again broke up its company into three spin-off businesses. And yet now we see full circle as large telecom companies gobble up other players. First Southwestern Bell announces an offer for AT&T itself (for $16 billion), now Verizon is scooping up MCI before Qwest has a chance to issue a more competitive offer? Are we destined to have one monolithic telecom industry?
And if it is all going to merge, what happens to these multi-billion mergers when Voice over IP continues to reinvent the entire telecommunications industry and literally knocks the legs out from the traditional telecom players?
You know what'll happen, and I know what'll happen. These will prove to be poor mergers and will end up costing the shareholders more money than any possible value that could be ascribed to the transaction. Everyone can predict the inevitable result except for the Boards of these firms.
Which makes you wonder why these firms always believe that failed mergers are a problem that "other" companies have, not them? My take: more long-term thinking would better inform the boardrooms of these corporations and we'd see less M&A and more long-term successful businesses and a healthier business ecosystem overall.
Posted by Dave Taylor at February 14, 2005 10:37 AM
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