12/ 10/ 2012 Dr am a kings | The Econom ist

Drama kings
True tales of terrible mergers
Jun 22nd 2005 | from the print edition
Deals From Hell

Robert F. Bruner

Wiley; 420 pages; $29.95.

Take the story of a pair of inexperienced Hollywood producers, one an ex-

hairdresser, who run through corporate millions faster than they can blink,
commissioning private jets to deliver flowers. Or the chief executive who sulks in
his private train car as a merger he doesn't like, eight years in the making, is
celebrated at the station. Or the management team that signs the papers on a
merger, gets into a private plane, and taxis down the runway before a call comes
to say that the other firm has changed its mind. As becomes clear from Robert
Bruner's new book, where the Greeks had theatre, the modern business world
has mergers and acquisitions.

Mr Bruner, who teaches M&A to both MBA students and executives at the
University of Virginia's Darden School of Business, has a fine eye for drama,
which helps enliven what at first seems to be a rather dull assessment of the
value of mergers. The bulk of his book is taken up by ten case studies of merger
failure—“deals from hell,” Mr Bruner calls them, in a rare rhetorical flourish—
paired with shorter assessments of similar deals that worked. Several of the
deals will be well, if not fondly, remembered by readers: Dynegy and Enron,
America Online (AOL) and Time Warner. Also included is a look at the 1968
merger of the New York Central and Pennsylvania railroads, so disastrous it led
to seven different government investigations, and the aborted 1993 merger talks
between Renault and Volvo, which temporarily destroyed a fifth of the latter's
value.

All these tales of rot and destruction would seem to run counter to Mr Bruner's
agenda, which is to argue that M&A deals usually return value for shareholders.
(He even briefly argues that the AOL-Time Warner merger was good for
shareholders—AOL shareholders, that is, because the merged company
outperformed internet competitors from the time of the merger to 2003.) If a

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12/ 10/ 2012 Dr am a kings | The Econom ist

merger is performed well, for the right reasons—to create value, rather than to
add glamour and use up excess cash—the merged company can do quite well for
itself. Mergers brokered during equity-market peaks also may fare poorly, Mr
Bruner suggests, as the buyer may be overvalued; and acquisitions in which the
buying company is straying far from what it knows—Sony's naïve venture into
Hollywood by acquiring Columbia Pictures, for example—raises the probability of
failure.

Another potential deal-sinker, it seems, is overconfidence. Mr Bruner's examples

of flagrant M&A failure run the gamut, but a recurring theme is that the heads
involved ignored or unnecessarily played down the possibility that things could
go wrong. Quaker Oats was certain it could make a profit from Snapple, an iced-
tea firm, as easily as it had earlier profited from Gatorade, a sports beverage.
Pehr Gyllenhammar, while chief executive of Volvo, pressed a complicated
merger with Renault even as shareholders grew cranky about Volvo lagging
behind the rest of the Swedish stockmarket. One could argue, though, that Mr
Bruner is displaying hindsight bias; it is hard to call a chief executive
“overconfident” if the deal produces the results he forecasted.

The tales of mergers gone wrong make for fun reading, in Mr Bruner's dry but
sympathetic prose. But they do not inspire much hope. Given the stories of
failure, it becomes surprising that any mergers go well. Mr Bruner disputes
figures which say that only 20% of M&A deals end up creating value, and decries
emphasis on the period between 1998 and 2001, when a total of 87 deals ended
up destroying $134 billion in shareholder wealth. If his advice were to be
followed, there would be a lot fewer bad mergers. Alas, while some of Mr
Bruner's warnings—paying in stock instead of cash is a bad sign—are peculiar to
modern business, flaws such as overconfidence and confirmation bias (paying
attention only to evidence that suggests the chosen course is the right one) have
been part of the human condition since long before the first M&A deal.
from the print edition

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