by Nicola Rowe

Created on: November 03, 2008   Last Updated: November 10, 2008

There's one reason and only one to merge one company with another: to create value. Not to satisfy the CEO's ego, not to "go global" and not to gain market share. No, a merger is justifiable only if the value of the new entity, Merged, Inc, is greater than the value of the pre-merged companies taken together. How often is this the case? Well, judging by the frequency of deals, you'd think it would be fairly often: global deals increased 26% from $3.4 bn in 2006 to $4.3 bn last year. But here's the kicker: according to accounting giant KPMG, 53% of cross-border mergers destroy value. Thirty percent make no difference to value. And just seventeen percent that's one in six, people create value. One in six! That's better odds than roulette, but merger-bound CEOs are still circling the casino.

Consider the $36 bn Daimler-Chrysler merger in 1998, spun to the public by Daimler's then-CEO Jrgen Schremppas a "merger of equals. In addition to strategically complementary product lines and geographical presence, $3bn of cost savings were projected. Instead, performance and the share price plunged. Chrysler's management team walked, the company ended up as a division of Daimler and it lost money hand over fist. A class-action lawsuit brought by investors was settled in August 2003 for 300 million (a separate suit brought by investor Kirk Kerkorian was dismissed). Daimler flipped what remained of Chrysler to private-equity firm Cerberus for $7.4 bn last year, retaining a 19.9% stake. And the slide hasn't stopped: Chrysler is in merger discussionsyet again, this time with General Motors. Harrowing? Yes, for shareholders. And for managers and also for workers and their families.

What lessons about mergers does the DaimlerChrysler story illustrate? First, gambling with shareholders' money is immoral. Boring blue-chips are the acme of American corporate achievement; if I hold shares in one, I put my faith in management. I don't need a mutual fund manager to tell me that past performance doesn't guarantee future returns, but even if I can't expect the captains of my industry to maintain course and speed, I ought to be able to trust them not to stave in the bow. Secondly, mergers are also immoral because they hurt people. Not just the thousands "let go" to realise cost synergies, but those around them, beset with survivor syndrome, who fear for their jobs as they grapple with new ways of doing things.

It's one thing to ask workers to change their ways to improve performance; it's quite another to have them dance to a different tune just because the CEO feels like changing the score. It's simply not fair to ask people to change if doing so won't increase value. Requiring people to change for no good purpose is just rearranging the deckchairs, and it's wearying beyond measure for those affected. Try it once, and you'll exhaust your staff; try it twice, and you'll transform any remaining goodwill into a reservoir of cynicism. None of Dante's circles hold a place for directors who sign off on a merger. But, since it's almost impossible to predict in advance which will be the lone value creator out of six projected mergers, directors who commit to a merger are wrong-headed - and usually in the wrong.

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