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Twenty years ago, the company now known as UAL Corp. (www.ual.com) made a bet on synergy. UAL decided that the whole would be more than the sum of the parts if it bought a car-rental company, a hotel chain, and other service businesses and brought them together under one roof with its United Air Lines unit. A board member, former astronaut Alan Shepard, asked: “Do we have to own all these companies” to get the benefits of cooperation? A good question about a dumb idea. “Synergy” should, perhaps, be shortened to “sin.” It could then be listed as the eighth deadly one, right after gluttony. In my experience, people often make decisions based on emotion, then use their reason to justify those decisions. Emotionally, we all want our companies to be bigger and broader, to have greater name recognition. So we sometimes tell ourselves stories. We convince ourselves that buying another company will unlock hidden capabilities, letting us move into new markets and sell products and services that were previously out of our reach. We call this synergy—but we rarely achieve it. UAL wanted us all to rent cars from Hertz Corp. (www.hertz.com) and stay in Westin Hotels & Resorts rooms (www.starwood.com) just because we flew on United. Um, why would we do that? Even if we find it convenient to make all the reservations at once, we can use a travel agent or online service and pick whatever hotel or car we want; we don’t have to conduct all our transactions with a single company. If UAL really wanted to cross-sell with Hertz and Westin, the companies could just transfer customers’ calls back and forth. UAL spent years unwinding its ill-fated acquisitions. That debacle didn’t stop Japanese consumer-electronics companies from making the same mistake and gobbling up U.S. movie studios in the early 1990s. Hmmm. Because I owned a Sony VCR, I was supposed to prefer movies made by a Sony Corp. (www.sony.com) studio? Or was Sony’s expertise in manufacturing VCRs supposed to make it a good filmmaker? The studio purchases were an even bigger disaster than UAL’s acquisitions. Also in the early ’90s, AT&T Corp. (www.att.com) bought up computer companies on the theory that, because computers transmitted data over phone lines, there was synergy between the computer and telecommunications businesses. In 1991, just before AT&T gobbled up computer maker NCR Corp. (www.ncr.com), NCR Chairman Chuck Exley griped that AT&T was “like an electricity company that wants to get into the Mixmaster business!” AT&T lost billions of dollars on its purchases. That should have been the end of synergy, but it wasn’t. In the late 1990s, @Home, which provided high-speed Internet access to homes, decided that it should combine with Excite Network Inc. (www.excite.com), which offered an array of Web services. Because I used an @Home cable modem, I was supposed to want to use it to buy services from Excite. I never understood just why, and, apparently, neither did many other people. The combined company has disappeared from the face of the earth. More recently, America Online Inc. and Time Warner combined forces (www.aoltw.com). AOL was supposed to provide more subscribers to Time Warner magazines. (AOL subscribers hadn’t already heard about Time, People, and Sports Illustrated?) Time Warner was to drive more subscribers to AOL—the theory apparently being that Fortune’s sophisticated business audience didn’t know about AOL. Sure, advertising Time Warner magazines on AOL and vice versa would generate some subscriptions, but, as Alan Shepard might have asked, did the companies have to merge to generate those benefits? Of course not. Don’t get me wrong. I’m not saying all mergers are futile. It can make sense to have a bank with 2,000 branches buy one with 1,000 branches and save by cutting the new, combined total to 2,500. But such mergers can be justified on the basis of tangible benefits, not some ephemeral hope for synergy.
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