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Deals Gone Bad
CNNfn: Street Sweep
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ALLAN CHERNOFF, CNNfn ANCHOR, STREET SWEEP: The merger boom
of recent years brought together a number of corporate giants.
But did those deals pay off for investors? Have the merged
companies achieved everything they set out to do, I think our
viewers know the answer, or were shareholders better off
before the deal? Well, here with his view is Nicholas
Economides . He`s a professor of economics at NYU, New
York University`s Stern School of Business.
Professor thank you very much for joining us.
NICHOLAS ECONOMIDES , STERN SCHOOL OF BUSINESS, NYU:
CHERNOFF: let`s first of all look at the general issue. So
many of the corporate executives are always promising better
products, better performance for the shareholders, lower
expenses. Generally speaking do mergers deliver?
ECONOMIDES : Usually they don`t and that`s the
unfortunate truth. But there are ways in which we can see the
various criteria under which we can judge mergers. For
example, we can see first of all, did they deliver new
products? Second, did they cut cost?s Third, did the merger somehow
happen because of some financial reason like the stocks were
wrong - at the wrong prices?
CHERNOFF: Let`s take those one at a time.
ECONOMIDES : Yes.
CHERNOFF: First of all the financial reason. Is the
financial reason sometimes the mere fact that investment
bankers are able to sell a deal to the corporate executive?
ECONOMIDES : It might be or it might be some
imperfection of the stock market, which maybe we should admit
that sometimes there are bubbles, there are imperfections.
Some companies are overvalued. Like AOL Time Warner (URL:
http://www.aol.com/) was overvalued at the time when it
bought Time Warner. So, there can be significant differences
between the real valuation - what we economists say is the
right valuation of a company - and the stock market price.
CHERNOFF: Although let`s keep in mind that the stock market
is essentially a market of individuals deciding what price
they`re willing to pay for a stock.
ECONOMIDES : Absolutely. But sometimes they all go
down the hill. All together as a herd they go down the hill and
sometimes they don`t. Sometimes you can have some sectors
like the Internet services sector where AOL was, which was way
overvalued at the point in time when AOL bought Time
Warner and it was very smart from the point of view of AOL.
They used a cheap stock. They bought a real good company.
CHERNOFF: We should of course point out that CNN and CNNfn
are part of AOL Time Warner.
ECONOMIDES : Yes. A good part.
CHERNOFF: The product, let`s talk about the product issue.
You mentioned that sometimes they - or they usually promise
more product. Now I`ve often seen this at press conferences
for banking mergers. The chief executive will promise oh,
we`re just going to be able to deliver more products to our
consumers. And I hear this from multi billion dollar banking
executives. And I wonder what are they holding back?
ECONOMIDES : Yes. Unless they really tell you that
here is the product and here`s how we`re going to produce it
don`t really believe them. I think that was one of the issues
in the AOL Time Warner merger that products, new products were
not delivered. Similarly in the Chase (URL:
tttp://www.chase.com/) merger we didn`t see the new products
out there coming from the merged company. And I`m going to go
down, down the list. I think HP (URL: http//www.hp.com/) ,
Compaq, for example didn`t even promise new products. They
just said we`re going to cut costs and that`s why we`re
merging. So, sometimes you find promise of products. Sometimes
you just find cut of costs as a reason.
CHERNOFF: And certainly cutting costs that`s something that
we often do see coming. Right away, as soon as the deal is
announced, they take out the ax.
ECONOMIDES : Yes. Yes they do. I mean that happens a
lot, but for the costs to be realistically lower you need the
companies to have similar divisions so that if they both
produce computers like Compaq and Hewlett Packard then you can
say well, they`re going to cut some of the factory costs.
CHERNOFF: Has that been a successful deal Compaq, Hewlett
ECONOMIDES : I don`t think so. I believe that that
deal never really had the potential of being successful. It
was fought to the bitter end. In the end the ones eho wanted the
merger won. I don`t think that this company is going to be a
successful company for example competing with Dell (URL:
http://www.dell.com/) for PCs. There're some divisions of
Hewlett Packard like the one that makes printers, the
instruments divisions and such divisions that are going to do
great. But the ones where both of them have some potential I`m
afraid they`re going to both lose.
CHERNOFF: Quickly in summary then what would your advice be
to corporate executives when the investment bankers come
ECONOMIDES : Be careful. Don`t be too optimistic.
Don`t just look at the present stock price as an indication of
what`s going to happen in the future. Price in the future and
the market in the future might be quite different than it
looks right now. If you`re going to make a merger make sure
you have great synergies, great new products or big costs
savings. Don`t do it otherwise.
CHERNOFF: Professor Economides , thank you so much
for your insight.
ECONOMIDES : Thank you.
CHERNOFF: .of NYU, Stern School of Business.
ECONOMIDES : Thank you.. .
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