Optimize: Mind Over Merger
With great fanfare, your CEO announces the big merger, and, for one day, your company beams with optimism and pulses with energy. There are news conferences, press releases, and television cameras. The deal is splashed across the front page of The Wall Street Journal. National Public Radio does a spot. CNBC chimes in with commentary. For one news cycle, your company's name is on the lips of every business bigwig from New York to Hong Kong.
At the end of 2004, investors and analysts could hardly keep up as one corporate titan after another followed this cycle: Sears and Kmart, Johnson & Johnson and Guidant, Oracle and PeopleSoft, Sprint and Nextel. And if the pundits are right, 2005 will feature even more blockbuster combinations that leave the market breathless.
Astute CIOs, however, know better than to celebrate the news of a megamerger. Instead of rejoicing, they stoically withhold judgment—and with good reason. The truth is, most big mergers fail when measured against their primary objective of creating greater value for stakeholders over the long term (see Real Deals—And Challenges).
Sizable mergers, in fact, are often a signal that an industry is mature or even in decline. Companies having trouble growing internally within a given industry decide to merge, creating short-term efficiencies that may—or may not—temporarily boost earnings, but actually yield little long-term gain.
Sometimes mergers make sense, of course. The right combinations allow companies to fill important gaps and become more innovative and growth-oriented. In particular, mergers that enhance a company's chance to create growth by disrupting another industry can provide blockbuster returns.
CIOs understand the inevitable headaches brought on by any merger. So they have to make their own assessment. Is this merger all it's cracked up to be? Can it create greater value by improving the combined entity?
For the megamergers of 2004, the answer to these questions would largely seem to be "no." Most of the combinations are classic examples of mergers undertaken primarily to slash costs, temporarily boost the top line, and snag established customers. The combinations might be strategic imperatives in declining industries, but they're unlikely to create real, sustainable growth over the long term. In such cases, a talented CIO needs to think about jumping ship early for better opportunities in more exciting sectors.
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