I have been following the announced merger between Hypo-VereinsBank (HVB) and UniCredito which could result in a further wave of consolidation in German banking. Now the equity analysts are hyping the shares of Commerzbank, since the theory is that Deutsche Bank will have to do a deal to protect its domestic market. But other than some short-term gains for investors, who really benefits from these mergers? I have long felt that most mergers – in fact, nearly all – generate enormous profits for investment bankers, lawyers, and senior executives, but are a lousy deal for employees, customers, and – over the long term – investors, especially shareholders of the acquiring company. Gretchen Morgenson examines the dark side of mergers in an excellent article in the New York Times Magazine:
Academic research suggests that few mergers add up to significantly
more prosperous or successful companies and also that acquisitions
during buyout booms, like the one we are in now, are more likely to
fail than those made in other periods. And when one company acquires
another using its own stock as currency, as commonly happens today,
shareholders’ stakes in the acquiring firm typically decline.What’s worse, there is a disturbing trend among some of the
most aggressive corporate acquirers to use deals to mask deteriorating
financial results at their companies and to reap outsize executive pay.
The complexity of folding companies into one another makes it more
difficult, whether by accident or by design, for investors to fathom
what’s really going on. Because mergers require the extensive use of
estimates on matters like job cuts and asset write-offs, for example,
deals represent an opportunity for management to throw everyday
expenses into the merger cost bucket and make operating results look
better than they actually are. It’s probably no coincidence that some
of the biggest frauds in recent years have involved serial deal makers
like Tyco International, Waste Management and WorldCom. (Long before a
jury found him guilty of securities fraud in federal court in March,
Bernard J. Ebbers, the chief executive of WorldCom, entertained himself
and his friends aboard his 118-foot yacht called the Aquasition.)Perhaps the biggest downside to mergers, however, is their
human toll. Deals that combine companies are becoming a bigger factor
behind large-scale layoffs across the nation.
The performance of cross-border mega-mergers is even more depressing. How many $$ bilions in shareholder value have been lost through the DaimlerChrysler merger? Recently the Bertelsmann unit Gruner & Jahr sold two US magazines Fast Company and Inc for a tiny fraction of what it had paid for them just four years ago. As one observer put it: "two magazines that sold for more than half a billion dollars four years ago now have a value of zero." So I am not optimistic that the HBV /UniCredito deal will have a good outcome. A good rule of thumb is to always close an account you have in a bank that is involved in a merger. You can be sure that you will have to pay more for much worse service. So I hope the board of Commerzbank resists the urge to merge.
