All urge, no splurge

Mergerphilia has a cure, according to mergerphobes, and Bob Bruner's Deals From Hell seems to fit the bill. The book is on Mergers & Acquisitions (M&As), and has one helluva frank title. As a mergerphiliac myself, and as someone given to fantasising any union of unlikelihood for its conjoint value of information and imagination, I confess a cognitive bias: I put off reading this title for weeks in fear of finding the odds of M&A success even steeper than my own guestimates.

Sigh... . That's a long sigh of relief. The "deals from hell" in this book are all particular cases, doomed for various reasons of their own. Otherwise, M&As are the way to go. In theory, they impart dynamism to market forces as they go about shuffling assets and resources around to put them under optimal management. By Bruner's assessment of actual deals, they add value in practice too, displaying about the same success rate as diversifications, product launches and the like: "Contrary to conventional wisdom, M&A is not a loser's game."

Shareholders gain value.

But only just. Even after neutralising the effects of overall market volatility, deals that end up with bigger market capitalisation of the merged entity tend to be those that are made under calm market circumstances, use cash instead of shares as the purchase currency, reshape the business in some way, grab market power and/or focus on a common market. Not to imply that diversification deals are bad news: they work rather well in "information-intensive" industries.

In terms of deal formats, Bruner is bearish on "mergers of equals" and bullish on "hostile" takeovers, though popular perceptions operate in reverse (perhaps because of softer integration issues, which he doesn't dismiss).

The book's academic contribution is in chapter 4, which specifies six factors that must converge for a deal to end up in disaster. If a merger involves complexity that hazes up the scenario, has no space for error, suffers lousy decisions, sustains cognitive biases, and is then struck by misfortune to which its response is inept""if all six go kaput in Boolean parallel""the deal detonates.

Statisticians may quibble about whether those events are independent of each other, and thus contest Bruner's probability calculation. But you get the basic message: an M&A is well within "the range of tolerable risk". And this would be plainly obvious to everyone, the author concludes, had it not been for the mania of "growth momentum" that prods managers towards deals intended to spruce up the quarterly results rather than generate genuine value. "At the core of merger failures are mistaken ideas about the growth that markets truly value," observes Bruner, after an Enron-raking tirade against the corporate devotion to charts showing sales and profit inclines.

That also explains why the most relevant "deal from hell" in this book is not Time-Warner's 2000 merger with AOL, damned by the latter's overvalued stock and derived desperation to splurge before the joyride turned pumpkin. It is, instead, the one detailed in chapter 11: toymaker Mattel's 1999 acquisition of a software firm called""with no less irony""The Learning Company. "Opportunism is not a strategy for success," scoffs Bruner, of Mattel's attempt to powder puff and disguise a crash in Barbie doll's sales.

Any surprise? The urge to merge should be natural, not synthetic. And could take time.

DEALS FROM HELL
M&A LESSONS THAT RISE ABOVE THE ASHES

Robert Bruner
John Wiley & Sons
Price: $29.95; Pages: 420