Monday, 24 October 2016

AT&T wants Time Warner. But who truly benefits from mergers?

The biggest pricks are certainly the men who feel the need to prove that theirs are bigger than anyone else’s.

Sadly, some of those men are women, and there will probably be more of them as women start to break through the glass ceiling in increasing numbers, and join more and more boardrooms.

Nothing in business is so good for proving testosterone capability than the acquisition of another company. It’s usually a relatively civilised process, with negotiations, give and take, intelligent analysis, proper legal documents and so on. But to the executives of the acquiring company, it tends to be seen as a proof of their manhood, as though they were the human equivalent of a tyrannosaur gobbling his prey (and I say his advisedly).

The irony is that the real beneficiaries of such deals are on the other side: they’re the shareholders of the acquisition target, who sometimes make far more for their shares than they could possibly be worth in anything like a rational valuation. Things aren’t so good for the staff of that company, who often find themselves paying with their jobs for their former bosses’ greed, or the customers, frequently pressurised to ‘upgrade’ a product or service with which they were satisfied, to the competing but not necessarily competitive version offered by the acquiring company. But, hey, who cares about employees or customers when you’re off to the bank with a cheque that may well see you right for the rest of your life?

Meanwhile, the acquiring company can discover at leisure all the problems the acquisition entails. In principle, they should have been unearthed during the purchase process, in what’s known technically as ‘due diligence’. But when you’ve got a manhood to prove, how long are you going to take over that? And which are you going to believe? The ghastly little accountant from you own company, with the fish-lens glasses, who says the target’s never going to achieve even 10% growth and might even contract? Or the genial Chief Executive from the other side, with his ready smile and his willingness to take you to wonderful restaurants visitors to the city never find, and who assures you it would take really determined effort to keep growth next year below 70%?

I’ve watched executives falling over themselves to buy companies whose sales have been in steady decline for years and whose products are way below standard and far behind the times. They even pay huge prices for them. And when you’ve paid a huge price, you can’t admit you’ve bought a dud. So they spend the next few years trying to persuade themselves that the albatross around their neck, for which they paid top dollar, is actually a soaring eagle. Eventually, they’re either forced to admit their error or (more likely) they’re forced out by another group of executives prepared to fire the staff who came with the acquisition and leave the customers in the lurch.

Time Warner: target of AT&T’s latest acquisition bid
Right now we’re witnessing the first steps in one of the bigger acquisitions, worth $85.4bn. AT&T wants to buy Time Warner. I don’t know how it’s going to work out. Regulators may or may not stop the deal. If they don’t, here are two predictions of which I have little doubt: the staff of Time Warner will find they’ve been royally screwed, and the customers of Time Warner will find that they’re being charged more for less of a service.

Will it work out for AT&T? Maybe. If they can use a step towards monopoly as a means to price-gouge customers, it might do. Otherwise, they’re likely to find themselves worse off. Why? When I worked, briefly, for the civil service many years ago, an excellent point was made to a group of us on a training course. We were asked how many people it takes to do four times the volume of work done by one person. The answer is five: four to do the work and one to supervise the four.

People often justify mergers and acquisitions on the basis of economies of scale. Now there’s a fine mirage. A bigger organisation seldom requires less management – mostly it requires a hell of a sight more. There’s nothing to guarantee that dumping one company on top of another, despite their different cultures and backgrounds, would necessarily be beneficial. Why should it be, after all? And indeed few mergers are successful.

On the other hand, the executives who pull off the acquisition get a good burst of testosterone out of it. That’s worth a lot. There may be a reckoning coming, but hey, that’s a couple of years away – and who knows, if the executive is at all smart, he (or she) may have traded this success into a new and better post somewhere else.

Where they may be able to pull the same thing off all over again.

No comments: