Dumb Mergers

(Illustrated by Kevin Kallaugher for The Economist)

I can't help but crack up laughing at that excellent cartoon by Kevin Kallaugher of The Economist. I mean, who came up with the dumb idea to merge two struggling airlines? Didn't we go through that phase in the 90's and it ended up with poor results for shareholders (not to mention taxpayers and travelers)?

It almost seems like the airlines always end up merging at the worst possible moment: right before an economic slowdown that can seriously wreck their balance sheets. How many want to bet that these two airlines are going to be worse off in 5 years than now? The stock market certainly isn't betting on good news. The stocks of both companies dropped when the deal was announced earlier this week. Maybe this has to do with the fact that management isn't promising any major cost cutting, other than some operational synergies (even that is questionable given that Northwest and Delta use different airplanes, with one being exclusively Airbus.)

An even worse merger is the proposed combination of Blockbuster and Circuit City. In a rare move, Blockbuster, which I perceive as being weaker, is bidding for the slightly stronger Circuit City (at a big premium to market price as well). I can the potential for cross-selling and synergies in this combination but it's a high risk strategy. Blockbuster, a company that couldn't get its own house in order, now supposedly can fix Circuit City.

Of course, all these mergers can work out in the end. But by rolling the dice with their risky strategies, they can be spectacular blow-ups as well. I feel like the chances of bankruptcy (i.e. shareholder return of -100%) is actually elevated by these mergers than if they were standalone companies. In contrast, the management and bankers pushing the deals argue that these deals lower the risk and expect better returns.