Megan McArdle thinks back to the great fiasco that was the AOL/Time Warner merger:
Austan Goolsbee (now the head of the CEA) spent a class getting us to describe all the reasons that the deal was a good idea — and then systematically demolishing all of our rationalizations. Mergers are not a good idea merely because one company has an asset the other company can use (in the case of the AOL/Time Warner deal, the idea was that AOL’s content and Time Warner’s delivery mechanism were two great tastes that taste great together.) AOL had a perfectly good way to get access to Time Warner’s cable network: the companies could contract to share space. When you buy a company, the price the owners will want you to pay is going to be at least as much money as they could make by holding onto the stock, so there’s no way to generate profits by buying some company simply because it has assets you want to use. In order for the merger to make sense, there has to be something that you can’t do as a separate firm, but can do together.
And that thing has to be pretty profitable in order to make up for the costs of the merger. Acquiring firms usually pay a premium for the companies they buy, which means that the new entity needs to exceed the combined profits of the old just to break even. Beyond that, mergers are extremely costly to the organization. Integrating redundant departments takes up enormous managerial time, involves most of the company in vicious internicene battles to protect their turf, and often involves sacking some of your most talented people simply because there’s an equally talented person already doing their job. Unless it’s a really hands-off acquisition — in which case, why bother? — the conflict between corporate culture often saps morale.
The couple of times a former employer of mine got “merged”, the pattern just about exactly matched what Megan describes. In neither case did the merged entity reap the expected scale of benefit that must have motivated the acquisition in the first place.
