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Merger enthusiasts take note: A lot of mergers end badly

David Weinberg Feb 18, 2013
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Merger enthusiasts take note: A lot of mergers end badly

David Weinberg Feb 18, 2013
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So far this month there have been several big buyouts — US Airways merged with American Airlines, Warren Buffet paid $23 billion to purchase Heinz and Dell went private for $24 billion. Banks are lending again, the stock market is rising and companies have a lot of cash lying around. That means the return of the mega deal. But do these mergers and buyouts make companies stronger and more profitable?

John Steele Gordon is a business historian with deep ties to the financial world. Both his grandfathers held seats on the New York Stock Exchange. Business history, he says, “is littered with the corpses of really bad mergers.”

It took him a minute to come up with an example of a successful merger.

“I think maybe the successful ones are the ones you don’t hear about subsequently,” Gordon says.

George Anders wrote Merchants of Debt — a book about the private equity firm KKR, which was responsible for the RJR Nabisco merger. Anders figures that for every deal that’s a success, “you’ve probably got two that aren’t.”

If adjusted for inflation, the Nabisco deal is the biggest buyout in history, which did not go so well. Anders says it should be a cautionary tale:

“Spend more money than anyone else, get more problems than anyone else.”

Despite the one in three odds, most companies think they can pull off the big deal.

“It’s totally a case of yes it’s a problem for everyone else but my deal is special,” Anders says.

There’s always an optimist who is convinced they will beat the odds.

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