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Why companies like AT&T love mergers

AT&T tried for months to craft a merger deal with T-Mobile.

Jeremy Hobson: Well let's get some perspective now on mergers and acquisitions and why big companies want to get even bigger.

Juli Niemann is an analyst with Smith Moore and Company. She's with us live from St. Louis as she is every Tuesday. Good morning, Juli.

Juli Niemann: Good morning Jeremy.

Hobson: Well first of all, Mitchell laid out the pluses there -- from AT&T's perspective -- of doing a deal with T-Mobile. Isn't the best way for a big company like that to grow to buy the competition?

Niemann: Usually, the company is sitting on a huge pile of cash and they're not using it. They don't want to give a special dividend to the shareholders, or even re-purchase their own stock in the market -- which is what they'd do if they really felt the stock was undervalued.

So they take this cash, they go out and get bigger companies -- but the problem is, large mergers never succeed... almost never. You've got a clash of corporate cultures; the highly talented people leave first; you don't have any growth because you're spending all your time slashing and burning the acquired company to get the expenses down to pay for the deal.

Customers are the big losers, because fees and charges go up. So the only ones who really win are the CEOs -- the bigger the company, the bigger the paycheck.

Hobson: What's the alternative then, if you're a big company, if you're not going to buy the competition? How do you grow?

Niemann: Smaller companies do make good acquisitions. Food companies buy specialty food companies; drug companies buy the smaller, innovative pharmaceuticals. Technical companies will buy a product line that fits an existing line-up. There are called bolt-on mergers, and these are very good strategic mergers.

But the large ones, unbelievable, simply because you never have the ability to get them to grow again. It'll be years before anything turns around. Smaller ones do work.

Hobson: Juli Niemann, analyst with Smith Moore and Company, thanks as always.

Niemann: You bet.

About the author

Juli Niemann is executive vice-president for research and portfolio management with Smith, Moore and Company.
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Another reason why big companies love mergers is that their execs, trained on Harvard case studies, are looking for the Big Decision to make: the acquisition, the divestiture, the new global expansion. The activities that build a business, the daily execution, they have never really studied and don't have as good a grasp of. What they know best are Big Decisions and financial window-dressing.

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