In the wake of the Exxon/Mobil merger, we’ve seen a small flurry of articles–including two in the New York Times –arguing that acquisitions generally don’t make sense, except for the shareholders of the company that’s being acquired. And in the wake of the New England Patriots’ move to Hartford, where Connecticut plans to build them a lovely $350-million stadium, we’ve seen a wave of articles arguing that sports teams are not sources of economic development and that deals of the sort Connecticut has offered the Pats are corporate welfare of the worst sort.
Both sets of stories are, of course, unquestionably accurate. What’s curious is that repeating these truths is still somehow necessary. You don’t have to keep writing articles that say “supply rises to meet demand,” after all. Yet when it comes to mergers and acquisitions and to stadium-building, the economically rational position has to be continually restated, because economic rationality is persistently trumped by corporate ambition, simple greed, and political posturing. And what’s especially appalling about the whole state of affairs is that in both cases wealth keeps getting redistributed upward for no apparent reason other than that it can be.
Some mergers, of course, do make sense. They remove excess capacity, improve productivity, or allow companies to benefit from economies of scale. But in evaluating any merger the basic presumption has to be that it’s a bad idea. This is not a subject for argument any more. It’s a fact. The empirical research is too strong to be disputed. As a result, we don’t need any more pieces about why mergers in general don’t work (and I’ve written more than a few of those pieces). We need deal-specific analyses of what real business purposes a given merger will accomplish.
Unfortunately, what we’ll find, more often than not, is that the merger is the product of delusions of grandeur, imaginary predictions of synergy, or, as Warren Buffett once put it, the irresistible desire to buy a company because everyone else is doing it. In the very worst cases, we’ll find that managers are orchestrating deals to line their own pockets, either in the form of lucrative golden parachutes or the piles of stock options they’re sitting on.
In the case of stadiums, we don’t even need deal-specific analyses, because no deal in which a state or city puts up hundreds of millions of dollars to build a stadium from which a sports team will derive all the profit is a good deal. When Pats owner Henry Kraft announced he was moving the team to Hartford, he wept, in as moving a display of crocodile tears as I’ve ever seen. The state of Connecticut itself, in its own study, says that it’ll take at least 14 years for the Patriots to generate enough revenue for the state to cover the cost of building the stadium. And that’s if everything goes perfectly.
The idea that the best way for an already debt-ridden state to spend public funds is to give the money to a multimillionaire would be staggering if it weren’t happening all across America. A sports team isn’t an auto factory, after all. Most of the revenue goes to pay the salaries, not of 10,000 blue-collar workers, but of 50 millionaire athletes, who deserve everything they can get, but don’t deserve to have their workplace subsidized by taxpayer money.
So why do these economically irrational things keep happening? For the most obvious reason: because the people for whom the decisions are economically irrational (shareholders in the case of mergers and taxpayers in the case of stadiums) are not making those decisions. In theory, they could. And in theory, they should. But so much smoke is blown in these cases that people still have a hard time seeing through it. And the costs are removed enough–we’ll have the stadium a year from now, but we won’t see the schools that haven’t been built as a result–that you need a longer-term perspective to see them. Of course, that’s no reason not to adopt that perspective. The Connecticut legislature and Exxon shareholders still have a chance to say no. Let’s hope they do.