Business Exposed54
and he began to turn me on”, also referring to “a marriage that was
consummated after a two-year irtation and a brief but painstak-
ingly intense two-week prenuptial discussion. ‘Mel seduced me’,
Redstone dreamily told reporters and investors after the merger
was announced, sounding for all the world like a blushing bride.”
Yet, the marriage came to an abrupt end in 2004, when Karmazin
left acrimoniously. What turned out to be the case: Karmazin
had negotiated, when the two were joined in holy matrimony
in 1999, that if old Sumner (aged 81) happened to die during
Karmazin’s employment contract with Viacom, he would take
the mantle. Yet, old Sumner didn’t die . . . and Karmazin was left
waiting for his inheritance longer than he had anticipated. CBS
and Viacom split in 2005.
To me, these kinds of negotiations suggest that the logic behind
a deal may have more to do with advancing the careers of
the people in charge, rather than advancing the value of the
combined companies. If you’re an investor or board member, I
would conjecture that some suspicion may be warranted.
When acquisitions take over
We have seen many rms go on acquisitions sprees, inspired by
their ambitious new CEO (who did not take long to go out in
a blaze without much glory). The aggressiveness, boldness, and
risk-taking behavior of the person at the helm had brought him
to that position, but it sometimes does not translate well into a
sensible corporate strategy. It outs itself in too many acquisitions,
but also in paying too much for them.
Firms are expected to base the price and hence the premium
they are willing to pay for a transaction on their calculations of
how much synergy the deal would be able to generate. Although
long-term value creation is always difcult to quantify with any
certainty, rms usually do the best they can and then determine
the target’s maximum price.
However, once executives have their mind rmly set on acquiring
a particular target but are outbid by a rival, this may be difcult to
553
n
The urge to conquer
swallow. Often, it seems to awaken the warrior in them; they go
back to their people and instruct them to “nd me another 100
million or so in synergies” in the target’s books, which enables
them to up the bid. For instance, we saw indications of this when
Mittal was bidding for Arcelor, and it is hardly unusual.
Clearly, this is a dangerous phase in a bidding process. Copious
research, for instance on “escalation of commitment” (which I
discussed in Chapter 2) in M&A deals has indicated that overex-
cited executives have a tendency not to walk away from a deal
when they should, mysteriously uncovering extra value in a
transaction when a rm’s rivals are starting to outbid them. But I
guess this bit is only human. It is the part which comes next that
always gets me. The company that ultimately “wins” the bidding
war is declared the winner – in newspapers, business magazines,
etc. They pop the champagne and celebrate, while the loser pouts
and has a crisis meeting.
But are we sure that you are the “winner” when you just paid 300
million for a company you originally calculated was worth half of
that? And are you sure you really are the loser when you just made
your competitor pay 150 million more than the darn thing is worth?
Somehow, I am not so sure, no matter what the newspapers say.
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