Resisting the Urge To Merge

Although the past few years have given us a boom in mergers and acquisitions that rivals anything we saw in the ‘80s or the go-go years of the ‘60s (when conglomerates became all the rage), this boom has been distinct because the vast majority of takeovers have been friendly rather than hostile. One would like to believe this is because executives have realized that hostile takeovers only magnify the immense problems any company faces in trying to assimilate the operations of another, but it almost certainly has as much to do with the lofty prices that are being offered for companies these days. (The more you’re offered, the less important independence seems to become–and rightly so, for the most part.)

In any case, one consequence of this epidemic of friendliness is that you don’t hear the expression “X company is now in play” all that much anymore. This expression was a staple of business thinking in the ‘80s, and was epitomized by the experience of RJR Nabisco, which became the subject of a huge bidding war after its management tried to take the company private in a leveraged buyout. A company came into play when a buyout or acquisition offer made the possibility of an acquisition suddenly seem likely, bringing other potential suitors–or sharks, depending on your metaphor–into the fray.

Last week, then, Sprint came into play, when MCI WorldCom made a friendly $93 billion offer to acquire it. Actually, we didn’t know that Sprint had come into play, since the company’s board looked kindly on MCI WorldCom offer and was, by all accounts, ready to approve it today. But this weekend, BellSouth stepped in to trump MCI WorldCom (which, full disclosure, I own shares in) with a $100 billion bid, and Sprint was officially on the block.

But Sprint, like any public company that isn’t controlled by a small group of shareholders, was always on the block. And that makes the whole idea of a company suddenly being “in play” dubious. BellSouth has had years (effectively, ever since the Telecommunications Act of 1996 was passed) in which to make an offer for Sprint. At any point along the way, it could have decided that merging with Sprint was in its best interests and bid. And if it had done so a year ago, or even six months ago, it almost certainly could have got a better price. Sprint was no more in play after the MCI WorldCom offer than before. Its status had not changed. Only BellSouth’s urgency had.

The point is that the phrase “in play” is a useful cover for the fact that takeovers, particularly hostile ones, are often the result of companies’ panicking at the prospect of losing something they never even knew they wanted until they realized they might not be able to have it. BellSouth, for instance, has been singularly restrained in its approach to the merger-mania that has swept the telecommunications industry. With the exception of a 10 percent investment in high-speed provider Qwest, BellSouth has been content to build its business from within. But in the space of three days it has thrown that strategy over, in favor of a massive bid for a company that it will find very difficult to integrate with, from both a regulatory and an operational perspective. And it’s hard to believe that this is really the way you build shareholder value.

It’s possible, of course, that BellSouth has had its eye on Sprint all along, and was just getting ready to pounce when MCI WorldCom beat it to the punch. But forgive me if I’m skeptical. You can’t conjure a takeover bid out of whole cloth in a couple of days and expect to have done the due diligence a successful bid requires. And if we learned anything from the ‘80s, it’s that there’s always a horde of investment bankers ready to convince executives that they really can’t afford to let this acquisition pass them by, and that there’s always a host of corporate executives eager to believe that bigger is necessarily better.

The market, unsuprisingly, recognizes that the opposite is just as often true, which is why the stocks of both MCI WorldCom and BellSouth have been driven down since they made their respective bids. The urge to merge is a powerful one, but resisting it is usually the smartest course. Especially when it’s an urge that seizes you only after it seizes someone else first.