This is David Henry's most recent USA TODAY column, which appeared July 16, 1998.

Firms find antidote to megamerger fever

NEW YORK - With nearly every CEO having caught the fever to do a deal, including Warren Buffett, Wednesday's news from two big medical companies, McKesson and HBO & Co., is a relief.

The two announced they were not going to merge. They are not in today's headlines with a $10 billion deal offering McKesson shareholders an 18% premium. Most surprising, the two companies had never said before that they were negotiating.

Why is no deal good? Because deal fever has turned pandemic and many a scholarly study has shown that mergers are risky, even if occasionally necessary, for everyone but investment bankers. Managers from the joined companies fight over turf. Promised synergies do not develop. Customers are ignored. Computer systems don't interface. When an acquiring company issues stock to make an acquisition, as is happening now in nearly all deals, returns to its shareholders usually falter over the next few years.

Professor Raghavendra Rau of Purdue University and a colleague found that among companies who did deals with high-priced shares from 1980 to 1991, stock returns lagged those of competitors an average of 17% after three years.

Why the poor performance? Partly because acquirers' shares are too high to begin with. But Rau suspects CEOs often are emboldened by their success in the stock market and then overestimate their ability to manage a takeover.

"In many cases, their exuberance is shared by investors who drive the stock prices up when a merger is announced," he adds.

Indeed, the 1990s bull market generally has gotten a boost from deals for companies at premium prices. But given the risks of failure in executing corporate combinations, investors could benefit from the example of a few executives who stop, look and listen before committing. There's no more vivid and timely proof of the hazards than the embarrassment now being suffered by Henry Silverman, the financial wizard who merged his HFS last year with CUC International to form Cendant and now complains his new partner's books were cooked.

Most of the time executives do weigh deals carefully. Investment bankers say that for every deal announced at least another nine were rejected without the public knowing. But rarely do companies offer a public model of restraint as McKesson and HBO & Co. did Wednesday.

The companies did not, however, say why they quit talking. In fact, Bruce Hochstadt, an analyst at Jefferies who follows HBO & Co., says they probably wouldn't have said anything had word not leaked late Tuesday that they were talking. Because the rumors claimed the deal would dilute earnings per share of HBO & Co., a consequence the company had said in the past it would not accept, investors hammered its stock down 4 1/16 to $32 1/16 Tuesday. "It seems like they had to do some damage control," Hochstadt says. The shares closed up 1 1/16 at $33 3/4 Wednesday.

The wariness of HBO & Co. investors and the companies' no-deal announcements come after several acquirers have suffered recently. "The stocks of buyers have really gotten pounded," says Tom Burnett of Merger Insight research service, citing as examples plunges in AT&T, Proffitts and Hilton shares. "That's new," he says. And a welcome change.

Real deregulation pains: When it comes to challenges in the new world of telecommunications, AT&T Chief Executive C. Michael Armstrong has nothing on Marcos Rodriguez-Ema, the Puerto Rican official in charge of selling a $2 billion majority stake of the government-owned telephone company. Rodriguez-Ema had to deal with a two-day general strike across the island called last week by union members to protest the sale and coming job cuts.

Little more than the San Juan airport was shut down, but the descriptions of trouble reaching the mainland were much worse and damaging. On Wednesday wire services said leaders of the telephone unions were ending their four-week strike of the company.

Rodriguez-Ema says the former monopoly is a wasting asset, losing market share to competitors including Sprint and MCI, who have moved in with encouragement of new federal laws. GTE, the first bidder for the majority stake, could improve efficiency and market new business. Look for the government to eventually sell its remaining shares to the public to help develop the island's capital markets.


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