The "Urge to Merge"

CNBC has been celebrating merger activity this week on their Squawkbox morning program. Their so-called economics guru, Steve Leisman, presented a summary of some old and new academic M&A research the other day. It told the expected story, for anyone who has studied this area at all, that most large, publicly-held company mergers and acquisitions destroy value for the acquirer. Some relatively obscure finance assistant professor from a second-tier school was interviewed regarding her recent study, and it pretty much sustained the work of 30 years ago.

Apparently, CNBC feels that recent trend in the volumes of M&A indicated a heightened "urge to merge." The reason opined for this was basically stronger stock prices provided an overvalued currency with which large companies can take out competitors, quickly grab needed pieces of their evolving business model, or simply spend the overvalued currency while it's buying power is so great.What I found provocative was Leisman's question, 'are companies doing any better making these combinations work?' The answer from the academic was, essentially, "no."That's also not surprising to me. In fact, I would guess that the value destruction percentages would be fairly stable over time as well. However, I would guess that, aside from the last reason for the increased volume of M&A deals recently, there are two other reasons.The first, in my opinion, is the increasing cost of mediocrity to large organizations. As I wrote in my last post, and will expand upon in future posts, mediocrity is a necessary companion to the modern large company. Such mediocrity means that most companies are in a position of being unable to develop, competently, themselves, what they can occasionally buy more easily in the form of another public company.

I think a different, but related, reason is the role of business technology in today's world. The rate of growth of a successfully-launched business concept today is probably unprecedented, even in America's fast-changing economic environment. Thus, as deep and liquid capital markets, plentiful outsourcing opportunities, and various technological resources are available, a new company can become a viable threat to an old, mediocre one much faster now than it probably could have, say, even 10 years ago.

With this kind of advantage to the newer entrants in a market, it's not surprising to me that more large companies are rushing to buy what they may not have time to build effectively. It causes me to have this image of a herd of large, old elephants being surrounded by packs of cheetahs, tigers and lions.

For example, Blockbuster, founded in 1982, is now being eviscerated by Netflix, founded in 1997. The stock price charts of the two, after Netflix's arrival nine years ago, are close to mirror images.

This is the sort of fear-inducing situation I can see accelerating acquisition activity at many large firms. Any guess as to how much longer Netflix has before a flood of web-based digital-on-demand sites gut its business model?