The Underlying Pressure
Mergers are hot again: According to Thompson Reuters, “so far this year, $2.2 trillion in deals has been announced globally.” But nothing brings home the irrational frenzy of today’s Investor Capitalism so much as the impressive scale of some of the failures.
The combination of Publicis and Omnicom, two of the largest multinational advertising firms, fell though a couple of months ago for internal reasons that could have been anticipated. Rupert Murdock’s effort to acquire Time Warner came apart not just because of that company’s resistance to the takeover but because shareholders were not impressed, while Sprint’s offer for T-Mobile, also collapsed, perhaps because of the threat of government opposition.
The Chairman of the FCC commented acerbically: “Sprint now has an opportunity to focus their efforts on robust competition” – implying that the merger was a way to avoid what. And that suggests how much the current merger mania may be fueled by the hope for quick profits.
The DealBook writer in The Times cautioned: “The danger with a mergers-and-acquisitions boom is that chief executives could allow themselves to get carried away by the thrill of the hunt, reducing their focus on internal investment projects that might have a better chance of bearing fruit.” But is it the hunt that excites them so much as the shortcut they see to growth?
The Times went on to comment: “some chief executives may have come to view takeovers as the only way to obtain big increases in revenue in a still lackluster economy.”
Some investors say they see signs of irrationality. No surprise as such signs are everywhere. David Einhorn of the hedge fund Greenlight Capital recently observed that some companies he is betting against — or selling short, in Wall Street parlance — have become the targets of takeovers, even though, in his view, they have significant weaknesses. “Companies we are short often have serious problems, of which the boards and management are probably aware,” he wrote in a recent letter to investors in his fund. “This makes them more eager than usual to sell at any sort of premium.”
In today’s markets, the least attractive path to growth is the patient, slow process of building a business. That’s what most managers like to do, developing their skills as they solve problems, expanding their markets as they learn more. That’s what workers like to do, becoming more proficient as they engage their tasks. Even executives like the experience of thinking about future directions to take as they gain greater and greater understanding of the competition as well as the opportunities provided by changing demographics, improved technology, and customer demand.
But investors who are now, increasingly, in charge of policy, only want the stock price to go up. They pressure top management to embrace strategies that have the sole aim of increasing “shareholder value.”
Most signs point to businesses now being more efficient and profitable. Profits are piling up, but that is now less a sign of success as a dilemma for management. Distributing profits in the form of dividends does not appeal to investors. Diversifying for safety isn’t sexy. Research takes too much time. Nor do investors want businesses to burden themselves with salaries and benefits for workers.
On the other hand, they are not against bonuses, stock options and benefits for senior management, the ones who can look for mergers or aquisititions to capture headlines and excite analysts.
No wonder senior management is feeling pressured into making hasty deals.