Why Bad Mergers for Customers Hurt Shareholders

A few years ago, just after the Sprint/Nextel merger, I dropped into my local Sprint store because my cell phone contract was about to expire. The companies had already merged brands, but the products in the store were positioned as if they were still two competing companies. The cell plans on offer were confusing and overlapping, so I walked out of the store and recommitted to my carrier that same day, despite being ready for a change.

In a similar vein, twice this year, I have had to go to FedEx Kinko’s for client work. I hadn’t set foot in one of these store in years and had not been a heavy Kinkos user since my college days, when I remember the service being very good and the prices being reasonable. I initially thought I had a hearing problem when the less-than-enthusiastic customer rep told me my total for a few enlargements and two color copies. I can understand a color copy costing more than $1 per page 10 years ago when no one had color printers, but I honestly could have bought a printer for what it cost to do a few pages. Unfortunately, I ended up in FedEx Kinkos again for another client project in San Francisco. We needed to pick up some foam board and tape for a trade show and the price of their products was completely absurd, with markups of 100%-300% over typical retail. Both times, Kinko’s had the chance to become my new go-to service shop, but instead became my option of last resort.

What do these stories both have in common? The mergers are both disasters. I have written about Spring/Nextel in my piece on execution (http://www.accelerationpartners.com/blog/execution-as-a-last-resort) , but a recent story in Business Week also highlights the failure of the FedEx Kinkos merger (http://www.businessweek.com/magazine/content/08_52/b4114078612060.htm?campaign_id=rss_daily).

When the problems of a merger are so bad they affect the consumer experience, it’s hard to image that merger is a success—no matter how rosy the management projections are about cost savings. Such talk may win over investors, but I am a firm believer that most mergers don’t make sense, and my guess is that about 90% are failures in one way or another. But if that’s the case, why are there by so many mergers? The answer is it’s a rigged system that puts a lot of economic value around the transition, with few if any incentives tied to the eventual success of the combined businesses. Founders, private equity firms and venture capitalists need an exit to make any return on their investment; and lawyers, accountant’s advisors, investment banks, etc. are paid on the deal closing. I recently read that advisor JC Flowers was paid $20 million to issue a fairness opinion on the Bank of America-Merrill Lynch merger, which was done in a weekend. (http://money.cnn.com/2009/01/15/news/bofa.unfair.fortune/?postversion=2009011515) . I am pretty sure the only party that did well in that deal is JC Flowers.

I will admit that I prefer the water cooler approach to noticing trends and changes in the marketplace rather than sifting through often biased research reports. These observations are what got me writing about real estate bubbles in 2002 (http://www.accelerationpartners.com/blog/its-a-lending-bubble-stupid/ ) and Web 2.0 bubbles in 2007 (http://www.accelerationpartners.com/blog/bubble-20/). My current observations have lead me to believe we are entering a sustained period of change where compensation is going to be tied a lot more closely to creating real, sustainable long-term value and this will have a big impact on M&A. The problem we have had in the past 10 years or so is that incentives have only gone in one direction, encouraging short-term gains for short-term payouts, at the expense of long-term results. In the case of M&A, this leaves acquiring company’s shareholders holding the bag. This behavior was born from three successive bubbles: the .com/ipo craze, the housing/mortgage craze and the hedge fund Bernie Madoff era, the latter of which made some companies millions just for placing money with Madoff. The easy money is just too hard to resist. But with the easy money gone and the M&A market at a standstill, I would suggest a novel approach of asking “how is this merger good for the customer” as a litmus test for new deals. If it’s not good for the customer, all the projected cost savings in the world won’t make it a success in the long term.

Leave a comment

Your email address will not be published. Required fields are marked *