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Tallying the Value of Mergers

"Mergers: Why most big deals don't pay off" (Cover Story, Oct. 14) was insightful but missed two reasons for so many large, senseless mergers. First, mergers trigger "change of control" provisions in executive-compensation plans of both companies, thus allowing the execs on both sides to profit immediately--through the acceleration of their stock options and deferred compensation--regardless of how the merger ultimately turns out.

Second, the investment bankers receive huge cash fees for putting the merger together, no matter what transpires. In fact, the same investment bankers are sitting by waiting to make more fees to help "unwind" ill-advised mergers later on.

William S. Lerach

San Diego

Efficient-market theory is an even more fundamental reason for why most deals don't pay off. In efficient markets, the value of a company is the result of the average of millions of shareholders' opinions on what a stock is worth. In a merger, a group of consultants and managers get together and decide that they know the value of the company better that shareholders. Millions of shareholders believe that the acquired company is worth X, the management think it's worth 40% more that X. Is it any wonder most mergers fail?

David Reid

Manchester, N.H.

If most mergers fail, might part of the problem be all those unneeded people who carried organizational memory in their heads?

Gary R. Guth

Highland Park, Ill.

The average buyer's one-year return over peers for your 15 "Big Deals" was 1.4%, and for all buyers paying cash was 0.3%--i.e., on average all Big Deals did pay off, as did all cash deals. The 8% decline by companies using stock was not large and was to be expected--the use of stock implies a company believes its stock is overvalued. The 15 "Big Losers" were concentrated in software (6), retail (3), and other tech (2). Factoring in the 36% premium to acquired companies' shareholders, who sell billions of appreciated stock immediately to merger arbitrage managers, mergers have been very good for shareholders overall.

Seth P. Washburne

Washburne Capital Management

New York

Editor's note: The writer's firm is a merger arbitrage fund.

Yes, there are a number of "serial acquirers" that, along with their shareholders, regret their overzealous buying. But there are also many blue-chip companies that created huge value for shareholders through M&A--GE Capital, Unilever, General Dynamics, Citigroup, and Danaher, to name a few. Ironically, the increasing reluctance of many boards to consider M&A in light of the failures of the 1990s has created a buying opportunity for well-managed, disciplined companies with strong balance sheets. While many of the serial acquirers from the past decade are on the sidelines trying to digest their acquisitions, it doesn't mean the rest of Corporate America should be fasting.

Eric Armour

Marakon Associates

New York

Post-bubble bulletin: Earnings anemia

Can bring on corporate bulimia.

Can't keep down everything that you bite off?

Spin off! Sell off! Kill off! Write off!

Reflex responses to burning question:

How to cure asset indigestion.

Andrew Sprung

South Orange, N.J. "Global poverty" (Special Report, Oct. 14) notes that "the IMF [International Monetary Fund] and the World Bank, whose prescriptions often work better in theory than in real life, still wield too much power." In fact, the loan conditions set by these lenders often call on poor countries to implement the exact opposite of the policies used successfully by all of the world's industrialized countries, including those in East Asia.

Rick Rowden

Alexandria, Va.

The remedies you suggest--education, health care, and ownership of property--are all obviously right. However, without health care that includes voluntary family planning, these other things are futile.

Jean H. Stuart

Edina, Minn.

Your splendid account would have been more bird's-eye, rather than worm's-eye, if it had included the overall numbers of those classified as being in poverty worldwide--defined by the World Bank as earning less than $1 per day. Those numbers peaked at 1.4 billion in the late 1980s and declined to 1.15 billion in 1999. A broad regional breakdown would have shown how variable poverty is in the world, with openness to trade an additional factor.

Herman I. Liebling

Bethesda, Md. "A foreign policy harmful to business" (Book Excerpt, Oct. 14) makes me wish Jeffrey E. Garten had been sitting beside me at Yale University listening to Charles Lindbergh recommending (before the U.S. became involved in World War II) that Americans get better acquainted with the reasonable goals of one Adolf Hitler. Lindbergh soon realized his error and became an active participant in direct action against what Hitler actually represented. Garten will find copies of that speech in the stacks of Sterling Library.

C. Bayard Sheldon

Hamilton, New Zealand

Garten is right on target. However, I see one problem with asking America's top CEOs to work together to moderate Washington's unilateralist policies: Many CEOs are themselves skilled practitioners of corporate unilaterialism.

Bob Emiliani

Hartford "The energy watchdog finally barks. But will it bite?" (Washington Outlook, Oct. 14) appears to assume that El Paso Corp. manipulated the markets in California and has been convicted of doing so. Nothing could be further from the truth. At all times, El Paso transported as much gas as possible consistent with safety and operational considerations.

We are confident that when the Federal Energy Regulatory Commission and the courts review the facts and the law, our safe, prudent, and legal operating standards will be supported.

William A. Wise

Chairman & CEO

El Paso Corp.

Houston Schools cannot do their job under intolerable conditions ("Closing the school gap," Social Issues, Oct. 14). The California legislature is studying a new master plan that includes an Opportunity To Learn Index. The index will not only reflect what teachers taught but will also inform the public whether students had qualified teachers, adequate textbooks and materials, a curriculum aligned with state standards, and a safe, clean environment. When published alongside the Academic Performance Index (measuring scores on the Stanford 9), the index will let the public see the effects of funding on achievement.

Walt Gardner

Los Angeles "Getting to the bottom of a company's debt" (BusinessWeek Investor, Oct. 14) explains that a credit rating should provide a consistent indication of the likelihood of default. Although it may be true for companies, the same cannot be said for municipal ratings. The ratings agencies have done studies showing that a corporate entity with a given rating has a default probability at least 10 times greater than a similarly rated municipal entity.

Peter Ghavami

Managing Director

UBS PaineWebber

New York

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