Dampening Merger Mania

Merger mania returned Monday, if only for a day, as $31 billion worth of deals were announced. Last month saw just $85 billion in mergers, the lowest total since December 1995, so the recent stabilization of the market and the Fed’s inter-meeting rate cut seem to have given buyers some renewed confidence. There is, of course, something ironic about the fact that these major deals–including McKesson’s purchase of health care software maker HBO and Co. and Kroger’s acquisition of Fred Meyer–would all be announced after a week in which the major stock indices rose more than 6 percent. After all, generally you want to buy companies when the market is down on them, not after their shares have rebounded. But that desire has to be balanced against the reality that financing is harder to come by during periods of market volatility, since banks don’t toss money around and investment banks don’t underwrite bonds as easily when they’re frightened about their own bottom lines.

The deeper irony in this sudden burst of merger activity, though, is that it follows a month that saw major deals called off for a variety of reasons. The Ciena-Tellabs merger collapsed after Ciena’s stock cratered when it lost a couple of important contracts. Kohlberg Kravis Roberts backed off from its purchase of Hoechst’s paint division when Hoechst refused to renegotiate on price. And, most strikingly, the merger between Monsanto and American Home Products, which was supposed to create a biotech giant, fell through, apparently over concerns about differences in corporate strategy and corporate culture.

When the Monsanto-AHP deal was announced, it was hailed as the next great step in Monsanto’s self-transformation from an old-line chemical company into a new life-sciences powerhouse. Monsanto has aggressively cut away and divested itself of old product lines while going on a buying spree, picking up seed companies and biotech firms and reinventing itself as one of the leading players in the fields of genetically-engineered crops. Monsanto’s long-term future remains very bright. Although the company has run into resistance to its crop-tinkering in Europe, genetic engineering of seeds is probably here to stay, and Monsanto has done an excellent–or insidious, depending on your perspective–job of creating crops that are unharmed by Roundup, which is the world’s most popular pesticide and which Monsanto, not coincidentally, happens to make.

Nonetheless, Monsanto’s freewheeling–and free-spending–approach was never going to mesh well with American Home Products’ more conservative strategy. The only real question about the deal’s collapse, in fact, is: What took so long? The differences between these two companies were hardly beneath the surface, and it’d be surprising to learn that anything came out since the deal was announced that could have changed anyone’s mind. It’s more likely that this merger, like so many others which have actually been consummated (to the detriment of both sides), had more to do with imperial ambition than with really adding value, to shareholders or to society.

That lesson is one that investors appear to be keeping in mind as they peruse the McKesson/HBOC merger. McKesson is a low-margin drug wholesaler, while HBO is a high-margin software company whose earnings have grown at a remarkable clip over the last five years. What McKesson could possibly add to HBO is a complete mystery, and while McKesson’s numbers will obviously look better going forward if it can add HBO’s $200 million in profits to its bottom line, it’s not too much of a stretch to imagine that McKesson will actually destroy value at HBO. These companies are in completely different businesses, and there’s not even a hint of possible synergy in what they do. This is a deal whose only results will be to line investment bankers’ pockets and to satisfy McKesson’s executives’ desire to run a bigger company. The absence last month of boneheaded mergers like this one made it one of the nicer months on the Street in recent memory. Let’s hope the mellow days of September return soon.