Tech CEOs ignoring merger lessons

Six days after Carly Fiorina announced Hewlett-Packard's plan to buy Compaq for US$25 billion ($35.1 billion) in stock, her nemesis, Michael Dell, called the deal "compelling".

Dell, founder and chairman of computer-maker Dell, wasn't lauding the move.

To the contrary, he said he was eager to grab customers as Fiorina and Compaq CEO Michael Capellas sorted out which products and brands to cut.

"Mergers of this size are hard to do," Dell said at a conference in San Francisco on September 10, 2001.

"The opportunity it presents to us, given the elimination of brands and the confusion - that's pretty compelling."

Dell was banking on a long-established trend in technology: big mergers don't work.

Fiorina, the heralded new CEO who vowed to push HP into the fast lane as easily as she did her silver Audi A8, was trying the near-impossible, said Krishna Palepu, professor of business management at Harvard Business School in Boston.

"It's hard to think of big mergers in the tech area that have actually worked," says Palepu, 50, who wrote a study of the deal. "In most cases, the money isn't recovered."

The lessons of mergers, including those learned after Compaq's own 1998 combination with Digital Equipment, haven't deterred CEOs lately.

The value of worldwide mergers last year rose 65 per cent from 2003 to US$2 trillion.

Software maker Oracle last month bought rival PeopleSoft for US$10.3 billion.

Flawed mergers like Compaq are not likely to dissuade others from trying Fiorina's route, Palepu says. Often, investment bankers will convince CEOs to make a big purchase to boost results.

In some cases, he says, bankers come in and ratify a CEO's plans, failing to determine if the purchase makes sense. "The incentives for the advisers are set up to make the deal happen, not to question it."

Palepu says that's surprising, because only about 30 per cent of all mergers - not just in technology - seem to create value.

In the case of Compaq and HP, the bankers were not brought in until July 2001, more than a year after Fiorina and Capellas had started talking about a deal.

Fiorina hired Goldman Sachs and Capellas hired Citigroup.

"They should have advised against the deal," says John Slocum, 64, a management professor at Cox School of Business at Southern Methodist University in Dallas.

"When you are marrying a weak division and a weak company, where are the synergies?"

Roy Smith, a finance professor at New York University's Stern School of Business who ran Goldman Sachs' London office as a partner in the 1980s, differs.

"Bankers feel it is not their job to talk a client out of doing a deal that they want to do," Smith says.

"In today's ruthless world, CEOs do not tolerate people talking back to them very long."

The mergers continue.

About US$150 billion of US acquisitions have been announced this year, up 32 per cent on the first five weeks of 2004.

Procter & Gamble is buying Gillette for US$52 billion, MetLife is buying Travellers Life & Annuity for US$11.5 billion.

In telecommunications, SBC Communications is buying AT&T for US$16 billion.

- BLOOMBERG