Sunday, January 2, 2005

The Corporate Chop-Shop

2005 is to be the Year of the Merger.  It's been declared such on the front page of the New York Times and who would argue with such a venerable icon as the NYT?  Year end 2004 found worn out old Sears and Roebuck marrying tired and careworn K-Mart, the two of them struggling to the alter trying to put the best face on Wal-Mart running off with their businesses. That deal capped 2004, a year that saw IBM pass off their PC business, Sprint gobble up Nextel and Johnson and Johnson . . . well, you know the scene, we've been there before. The last big-hitter year for mega-mergers was 1999 as the bubble was stretched to bursting.


And burst it did. They always do. That's the magic of free enterprise, the escape valve that fosters periodic heads of steam, the sun that  melts the wings of Icarus. It's a self-righting system, god bless it, never all that far out of balance.  The Business Cycle, a known entity as studied to death as Hemingway in a lit class.  Yet here are the Harvard MBA captains of industry, goosing their stocks with another round of failed '90's strategy.


All the players know that mergers are a failed scheme and an empty promise. Name me a merger that made a stronger player of the merged parties. Daimler Chrysler? You've got to be kidding.


But the players know there's gold in arranging that stroll down the aisle to corporate marriage and if the failure rate is about the same as conventional marriage, the gift list is larger and the investment bankers get to run off with the silver. Insiders watch their lackluster stock run up a few points (which never hurts anyone all that much) and executives on both sides frost the wedding cake with deferred stock options, early retirement packages and one-time bonus structures that assure no one is likely to fart in the limouisine on the way to the reception. The band plays, everyone talks up how handsome the groom and lovely the bride, agreeing that two can certainly live more cheaply together than apart, the canapes are gulped down and toasts proposed to the future family.


Now consider all of these enticements to merger. They're all powerful inducements to the movers and shakers who dream these things up, yet none of them have the slightest influence on profit or efficiency. They are made to fail 'cause there are profits in the failure as well. Divisions are sold off as the participants rid themselves of the disappointment of the last merger. It's the Great Corporate Canasta Game and winning depends on who picks up the largest discard pile, not caring a damn if the cards match the hand. 


No one really worries, because pretty much by definition it can't possibly work. Two huge merchandizers, unable to make themselves profitable (or even sustainable) under present managment are unlikely to benefit from a merger that's twice as ungainly and four times as complicated. Their hope (perhaps) is that in the smoke and confusion private fortunes will be made and public monies will do the making. I don't know where the institutional investor stands in this melange, but perhaps he's merely desperate to put his money someplace.


It's a common truth that automobiles are worth far more as parts than as functioning transportation, else how would chop-shops be such profitable businesses. A pretty good case can be made that investment bankers are the chop-shops of the corporate world and that the bidding they encourage for those polished up old family cruisers on the auction block of merger mania aren't intended to take anyone anywhere. The money is in the pieces. The big dough is in the pulling apart and although it's dirty, gritty work and someone's likely to get a finger smashed or a forearm burned, the guys behind these ruined junkyards always live in the poshest of suburbs.


So, if I've set my watch correctly, 2005 will be the year of the mega-merger and the year of the bubble has yet to be determined. But I put it just about the time of the inauguration following this one. That will be the culmination of corporate and federal chop-shopping.