Four underwhelming mega-mergers that might give Microsoft-Yahoo pause

Large acquisitions don't always have stellar outcomes, as earlier examples show

We're in the midst of the "greatest-ever merger wave," according to an article published last month by The Economist, a publication that is supposed to know about these things.

Microsoft Corp.'s $44.6 billion cash-and-stock offer for Yahoo Inc. — which could lead to a record deal from a price perspective in the high-tech sector — only adds more fuel to the merger-hype fire.

But if the acquisition that Microsoft proposed last week does go through, will it work out? The track record on such mega-deals isn't always good, nor are mergers and acquisitions in general a panacea for the participants in most cases.

Even supporters of M&A activities acknowledge that fact. For instance, in a report issued last July (download PDF), The Boston Consulting Group Inc., while generally championing mergers and acquisitions, said that nearly 60% of the M&A deals it tracked from 1992 to 2006 caused the acquiring company's stock price to fall. And it noted that on average, "larger deals have a higher probability of failing."

Things haven't necessarily changed since 2002, when Alfred Rappaport, then a professor emeritus at Northwestern University's J.L. Kellogg Graduate School of Management, wrote in a column for The Wall Street Journal that buyers typically overpay for the companies they target, due partly to being overly optimistic about cost-cutting opportunities and their superior management capabilities.

Rappaport said that two-thirds of acquiring companies see their stock prices immediately fall upon news of a deal, a drop that "usually corresponds" to performance of such stocks over the next year. The "sobering facts" about mergers and acquisitions, he wrote, are that "a majority of them don't work."

So perhaps it's an omen that the price of Microsoft's stock has fallen about 10% from its closing price last Thursday, prior to the announcement of the Yahoo offer on Friday morning. It's fair to note that Microsoft's stock already had been on a downward track before the announcement, in keeping with the overall market decline. But here is a cautionary look at the four biggest deals of the past decade -- all larger than the proposed Microsoft-Yahoo one, and all with less-than-stellar outcomes.

Deal: Vodafone Group PLC buys Mannesmann AG (completed in 2000)

Price: $183 billion in stock

Why: Vodafone, the U.K.'s largest mobile network operator, felt threatened by Mannesmann's purchase of Orange PLC, then the third-largest mobile carrier in the British Isles. In retaliation, Vodafone made an offer for Mannesmann, which was Germany's second-largest telephone company after Deutsche Telekom.

Hostile or friendly: Hostile, partly because of the German public's concerns about foreign control of companies. But that didn't stop Mannesmann's board from later agreeing to an increased offer from Vodafone.

Post-merger: Vodafone recorded aggregate losses amounting to $41 billion for its 2006 fiscal year, most of which it blamed on the aftermath of the Mannesmann acquisition. It lost another $10 billion in the fiscal year that ended last March (download PDF). And the company's stock price remains 40% below its peak level before the acquisition. On the other hand, buying Mannesmann helped Vodafone become the world's largest mobile carrier at the time — a position it has maintained through numerous acquisitions and joint ventures around the globe. Vodafone currently has about 200 million customers in 25 countries. Deal: America Online Inc. buys Time Warner Inc. (completed in 2001)

Price: $164.7 billion in stock

Why: To combine the best of new and old media, bringing together a wide variety of content (from Time Warner) and eyeballs (i.e., the user base of 20 million subscribers that AOL had at the time).

Hostile or friendly: Friendly, although the bursting of the dot-com bubble soon after the deal was announced took AOL's share price along with it — causing friction over who was really taking over who.

Post-merger: You thought Vodafone's $41 billion loss was bad? AOL Time Warner lost $100 billion in 2002, including a $99 billion write-off stemming from AOL's decimated stock price. The company has since renamed itself Time Warner Inc., but its stock price is still more than 80% below the merger-era peak. AOL LLC is now a majority-owned subsidiary of Time Warner, and its Internet access business is a shadow of its former self, with only about 10 million subscribers as of last year's third quarter -- putting it in third place overall among Internet service providers in the U.S. Time Warner today announced that the subscriber count dropped to 9.3 million during the fourth quarter. And the company said it plans to split AOL's ISP business and the subsidiary's higher-priority Web portal and online advertising unit into separate entitities — a move that could be a prelude to a sell-off of the access business. Deal: Pfizer Inc. buys Warner-Lambert Co. (completed in 2000)

Price: $116.7 billion in stock

Why: At stake was control of the lucrative cholesterol drug Lipitor, which the two companies had previously co-marketed.

Hostile or friendly: The deal was very unfriendly. Warner-Lambert was in the midst of buying American Home Products Corp. for $70 billion in 1999 when Pfizer launched its higher bid for Warner-Lambert.

Post-merger: Pfizer's revenue nearly doubled to $30 billion after the acquisition. It became the largest pharmaceutical company in the world in 2002 after another mammoth acquisition, in which it bought Pharmacia Corp. for $59.5 billion worth of stock. Lifted by its other widely popular drug, Viagra, Pfizer in January reported revenue of $48.6 billion and net income of $8.3 billion for last year. But profits were down 57% from 2006, while revenue increased just 1%. Growth has been stagnant, partly because of the failures of several experimental drugs. Pfizer's stock price has fallen 33% since 2000, and the company has undergone several rounds of layoffs, including a cut of 10,000 workers last year. Deal: Glaxo Wellcome PLC buys SmithKline Beecham PLC (completed in 2000)

Price: $76.0 billion in stock

Why: To keep up with Pfizer, according to comments made at the time by Glaxo Wellcome's then-CEO.

Hostile or friendly: The latter. The deal was a rekindling of an earlier failed merger attempt between the two British pharmaceutical makers.

Post-merger: The combined company, called GlaxoSmithKline PLC, became and remains the second-largest pharmaceutical company after Pfizer. But while GSK is still hugely profitable, its stock price has fallen 22% since the merger. And with business growth slowing, GSK said last October that it would lay off 5,000 employees, or about 5% of its workforce.

Sources: Computerworld, IDG News Service, SFGate.com, Wikipedia, CNNmoney.com, TimeWarner.com, The Wall Street Journal, BBC, FierceBiotech, Yahoo Finance, ISP-Planet, Morningstar.com, Crain's Chicago Business, The New York Times and the Institute of Mergers, Acquisitions and Alliances.

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