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| Mergers and
acquisitions have always had a Wizard of Oz aspect to them. The personalities of those
involved seemed bigger than life. Voices boomed. Fire flashed. Smoke was everywhere. In Big
Deal: The Battle for Control of America's Leading Corporations, seasoned investment
banker Bruce Wasserstein shows that the men behind the curtain only think they're the ones
pulling the levers. He demonstrates that the history of M&A is really about changes in
the flow of information and improvements in technology. In his readable, instructive
history of the more warlike side of American business, Mr. Wasserstein begins with the
early battles for control of the railroads and continues through the "digital"
combinations of the 1990s. Mr. Wasserstein says information about companies was
concentrated in the hands of a few key industry players for a very long time. The result
was that mergers tended to be conducted within a clubby group. Government regulation began to force companies to disclose more information to shareholders, giving the public a basis for evaluating merger possibilities. But, even during the merger boom of the late 1970s and early 1980s, the public was at a disadvantage. Information was still concentrated, this time in the hands of stock traders, as well as the key industry players. Arbitrage became the name of the game. Generally, risk arbitrage takes advantage of inefficiencies in a market. For instance, if a sweatshirt costs $45 in the U.S., and $85 in Europe, an arbitrageur might buy sweatshirts in the U.S. and sell them in Europe. On Wall Street, arbitrageurs would develop a hunch based on their access to information about public companies. They'd buy big blocks of stock and profit if a merger went through. Assembling those blocks even sometimes contributed to a merger because their owners could pressure a company into selling. But cable television, the spread of the Internet, and other improvements in communications wiped out the advantage the arbitrageurs held. Once upon a time, only Wall Street employees and other select people could read the breaking news sent over the wires by proprietary services such as Dow Jones and Reuters. Now, we all get up-to-the-minute data. So, many of the information inefficiencies—and potential arbitrage profits—have been eliminated. Today, the entire risk arbitrage market is only valued at only $6 billion to $10 billion a year. In the mid- to late 1980s, the advantage in mergers and acquisitions shifted to those who, because of good track records, had the easiest access to capital. Companies or individuals would borrow heavily and buy companies with high fixed costs. The idea was that even a small increase in sales would go almost straight to the bottom line, because variable costs were such a small part of the total. But this model lost force in the 1990s as the capital markets grew in sophistication and liquidity, largely because of improvements in the use of information technology. Now, no particular group has either a financial or an information advantage. So, mergers and acquisitions are having to become more strategic and less opportunistic. As a result, the merger business is finally entering early adulthood. Mergers and acquisitions will be based more on the mutual advantage of the parties involved, and less on the idea that companies should vie to seize control of each other. The interesting thing is that, with the Wizard of Oz fantasy eliminated from the M&A world, the real challenges in doing mergers turn out to be both more difficult and more fun than the myth would suggest. Ms. Flanagan is a vice president in the Strategic Technology Group at NationsBank. She is reachable at joanna.flanagan@nationsbank.com. Warner Books, 820 pages, $30. |
