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Big Deals Gone Bad
Allan Chernoff
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.


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.


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: 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. (INAUDIBLE).

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:// 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// , 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 Packard?

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: 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 knocking?

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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