A recent study by Mitchell Madison, a consulting firm, found that between 1995 and 1998, a period of great gains for the market over all, stocks of merged banks underperformed their peers 82 percent of the time. Such rates of failure are likely to increase in the future. Expensive stocks make it even more difficult for executives running the huge combinations to succeed in their marriages. We're looking at companies now that are so highly valued on their own that they already have to run very hard just to stay in place. Add a takeover premium to these prices and you get expectations that even the most brilliant manager could not hope to meet.
History also gives ominous news to shareholders in today's megamergers.
In the past, the larger the target was, the lower the return to the buyer generally was. But if you overpay in an Exxon-Mobil case, it will have a huge impact. Indeed, most acquisitions fail, academics say, because the postmerger company's business cannot support the price paid to forge the combination. Consider two cases from 1994. One reason that stocks of the acquirer may underperform is that investors realize sheer size by no means translates into higher profits.