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Robin Sidel
New York, Oct 17: Corporate America, eager to profit from the worldwide merger frenzy, is discovering it takes more than a frothy stock market to keep a deal alive.
A handful of transactions have fallen apart in recent weeks, victims of overeager executives and investment bankers who did not do their homework.Although stock market volatility may be the final factor to kill a deal, merger experts mostly blame the failures on disregard for the basic tenet of mergers and acquisitions -- due diligence.
After widespread rumours that trouble was looming, American Home Products Corp. and Monsanto Co. on Tuesday dropped their $35 billion union. Just hours after that announcement, Cendant Corp. and American Banker Insurance Group Inc. abandoned their $3 billion deal.
The failure of those transactions came just a few weeks after telecommunications equipment makers Ciena Corp. and Tellabs Inc. dropped their troubled $4.7 billion union.
"When you get into an acquiring frame of mind, it's like a love affair: youabsolutely block out anything closely approximating reality about a person's flaws. It doesn't take a brain surgeon to look at two companies and say, ``There are going to be problems because they're so different,'' said Myron Beard of RHR International, a consulting firm that helps companies integrate mergers.
US mergers already are at record levels for the year, but the pace of mega-deals has slowed dramatically in recent weeks amid global stock market turmoil. The first nine months of 1998 saw $1.282 trillion worth of deals announced, compared with $563.47 billion in the year-ago period, according to Newark, N.J., based Securities Data Co., which tracks merger activity.Wall Street is worried about several other deals that have not yet been consummated, such as ATT Corp.'s proposed purchase of cable giant Tele-Communications Inc., which was valued at $48 billion when announced in June. ATT has repeatedly said it is confident it will close the transaction.
"A lot of relatively marginal deals have beendriven by stock prices. Even though the deal economics were marginal, they felt they were getting an advantage. As the stock prices fall and start to more closely resemble the real value of some of these businesses, I think companies are taking a second look at marginal deal economics," said Mark Feldman, partner in the mergers and acquisitions practice at Pricewaterhouse Coopers.
Indeed, companies have not been shy about admitting the need to expand rapidly to compete in a global economy where geographic boundaries are becoming less significant.
"Up until a month or two ago, there was a feeling in certain industries, whether it was banking or healthcare or pharmaceuticals, that, `Unless I move quickly, I'll be the last one standing at the wall at the party with nobody asking me to dance,'" said David Nadler. chairman of Delta Consulting Group Inc., which provides merger advice to companies.While that may work when stocks are roaring to record highs, a strong dose of reality can kill a transaction.
"Alot of these deals look good when first cooked up, but they don't stand up in the light of day," Nadler said.
The collapse of the American Home Products-Monsanto deal has largely been attributed to conflicts between the top two executives, who reportedly were unable to agree on key issues. It was American home Products' second merger stumble this year, having previously been jilted by British partner SmithKline Beecham Plc.
Merger experts had sounded alarms about the Monsanto deal when it first was announced in March because the plan called for the top executives of both companies to run the new entity together -- a structure widely criticised by business experts as unworkable. Furthermore, Monsanto already had its hands full with integrating other recent acquisitions.
Meanwhile, the other big cancelled deal was attributed to a huge drop in Cendant's stock price that followed the disclosure of accounting regularities tied to a previous acquisition.
Experts say the deals most at risk are those in whichbuyers are moving into unfamiliar businesses, when egos are fed by the prospect of power and big money.
"There is a lot of chest-beating that's going on these days as people try to one-up each other on deals," said Feldman, of Pricewaterhouse Coopers.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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This story was printed from Net Express located at http://www.expressindia.com. Net Express provides a portal to India, with news from The Indian Express and The Financial Express along with sites on travel and tourism, the entertainment industry, the power sector, the environment and much more.
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