Consider this sentence from an article in today’s Wall Street Journal about the just-announced merger between aerospace and electronics giants AlliedSignal and Honeywell: “The attractiveness of the deal has investment bankers on the prowl, looking for clients who might be interested in making a competing offer for Honeywell.” Could there be a clearer explanation for why so many mergers and takeover battles end badly?
The Honeywell-Allied Signal merger (which is really an acquisition of Honeywell by Allied Signal) is that true rare bird on Wall Street: a deal that makes economic sense for shareholders in both companies. Allied Signal has demonstrated an ability to acquire companies, integrate them into existing operations, and improve their efficiency that’s perhaps unparalleled in corporate America, while Honeywell offers technological expertise belied by its familiar identity as the maker of those thermostats we all had in our homes while we were growing up. Even more strikingly, the two companies have genuinely complementary businesses in the aerospace industry, which means that their customers will benefit from the ability to buy all-in-one packages.
“The art of the deal” is an evocative phrase (even if Donald Trump did co-opt it). But the art of making deals work is a far more arcane subject, and one that only a few companies–AlliedSignal, USA Networks, Cisco, and GE come immediately to mind–have mastered. The stock market recognizes this about AlliedSignal, and sees the huge upside to this deal. That’s why, in a break with Wall Street tradition, both AlliedSignal’s and Honeywell’s stocks rose after the deal was announced. (Typically, only the stock of the company that’s being sold rises.)
For once, then, what finance professor Mark Sirower calls “the synergy trap”–the tendency of companies to pursue (and often overpay) for acquisitions in pursuit of the illusion of synergy–appears to have been avoided. But instead of recognizing that AlliedSignal is the best potential partner for Honeywell, all these investment bankers are now circling, hoping they can convince another company that if AlliedSignal is willing to pay $14.84 billion for Honeywell, the new company should be willing to pay $15 billion (or whatever it would take).
Now, you might say, “Well, what do you expect?” And I don’t really expect more. But the problem is that what’s in the best interests of investment bankers is not necessarily in the best interests of their clients (or rather, their prospective clients). CEOs are already prone to making acquisitions for the wrong reasons, namely because they want to run bigger companies, or because they believe they can wring supposed inefficiencies out of the companies they buy, or because they believe that one plus one always equals more than two. They don’t need some investment banker whispering in their ear that Honeywell sure looks good, not when Honeywell has already found the best partner it could find.
The point is not that if these unnamed bankers scare up a couple of more bidders, Honeywell will suffer. If someone’s willing to pay $20 billion for the company, its board of directors should probably take that offer (although in the long run value will probably be destroyed and not created). The point is that the winning bidder will suffer. Obviously, it’s always a problem when you talk about saving people (or companies) from themselves, but in this case the bankers should leave well enough alone. Everyone–AlliedSignal, Honeywell, the companies that don’t make bids, and the economy as a whole (because of the productivity gains the deal will create) will be better off.
