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Why Those Mergers Could Implode



Are high-octane stocks the funny money of the '90s, leading to mergers that could fall apart down the road? Are CEOs underestimating the organizational and cultural hurdles of blending giant companies, each with tens of thousands of workers? Does anyone on the Street remember the go-go years of the '60s and the junk-bond days of the '80s?

Many mergers in the current wave make sense, especially when they are in the same industry, generate synergies, and involve mutual respect by both corporate managements. Trouble begins when CEOs go into the merger betting on rapid earnings growth while misjudging the difficulties of bringing together very different kinds of companies. This is particularly true when managers then try to squeeze quick cost savings out of the merged company and wind up offending customers and disappointing investors (page 132).

The Union Pacific-Southern Pacific and Aetna-U.S. Healthcare mergers suffer from problems due to haste in cost-cutting. Union Pacific let go thousands of seasoned workers and consolidated railyards. But three major crashes followed, cargo got lost, and clients were left holding the bag. Aetna moved too fast to integrate U.S. Health, was clueless about rising costs, created a claims backlog, and angered customers. Both are slowing down to better serve their customers.

Virtually every serious study done shows that it is very difficult to bring off a successful merger. That's the danger in the current environment, in which stocks with supercharged price-to-earnings ratios make mergers all too financially easy. Instead of new efficiencies and savings for customers, mergers can generate delays, bad service, and higher costs. Bottom line: It's a lot easier to play the acquisitions game with high p-e stock than it is to manage a successful merger. That's a word to the wise for both CEOs and investors.

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