Sunday, April 29, 2007

Big Merger == Bad Merger

At least mergers of companies of about the same size.

You can google about statistics relating big mergers, you will find that most of the time they end up destroying the bidder value and enriching the companies management. There is this old article from "Business Week" to begin with, and "Owners Lose and Bosses Win in Bad Mergers" from "The New York Times".

If the odds are against mergers, one wonders why they at all happen. One reason is that the bidding company becomes larger and thus its management tends to receive greater compensation, in line with the increased size; thus creating an incentive for management to merge regardless of the merits of every merging. Beyond that, Wall Street also benefits. The Investment Banking business of a big merger may leave literally hundreds of billion of dollars in gains for Wall Street's operators; this is a great incentive for Wall Street to persuade the management of companies thinking about the possibility of a merger to go forward, and also an incentive to use their leverage in the financial press and media to give good publicity to them, so that public opinion eases the process.

There are other incentives as well, for instance, it is rumored that Carly Fiorina at certain point wanted to make use of her celebrity status to further political aspirations, and the chance to get lots of media exposition was something like the Compaq merger. While I do not necessarily agree with this rumor, I mention it here because it is rather easy to imagine that things like that may happen.

What is important is that once the merger has completed, Wall Street's pirañas have got their money and the true value of the combined entity is allowed to emerge, destroying the shareholder value.

Of course that I am writing this in relation to AMD's ATI acquisition, the day the talks were announced that Monday after the presentation of Q2 '06 results, I couldn't help but think that all the talk about the synergies was empty, and all of those words of keeping working closely together with nVidia as outright lies. What was true was that Intel was going to cut businesses with ATI and that the merger was going to have high costs for AMD.

I explained to my satisfaction (at least for the time being) why I criticize this merger. I just want to hypothesize about why it happened: AMD's management is gullible because they have an inferiority complex (a subject I have been writing about) and anything that may upset Intel gets their interest. ATI's management knew the very poor condition of the company (yes, this is my gut feeling, I don't have evidence) and tricked their AMD's peers to bite the bait. Then, Wall Street's pirañas made sure it got through with good publicity and stock price manipulation... from less than $17 per share it got to over $27!, but now, it is becoming increasingly clear that AMD paid premium for a nest of lice.

Nevertheless, I have repeatedly stated it, there are projects that can really display AMD/ATI synergies, like torrenza 3D coprocessors. Sadly, for these few projects, AMD sees them from either the perspective of AMD or ATI but not the combined company's: To use ATI's expertise to develop physics torrenza coprocessors?: NO! they would "cannibalize" existing AMD processors businesses. 3D Graphics torrenza socket coprocessors?: Even worse! they would cannibalize the very lucrative —and absurd— "graphics supercomputer in a PCIe expansion card" businesses. Intel stubbornly insisted in the "Front Side Bus" approach to memory interfacing to defend chipset businesses. Did that insistence lead to anything good for Intel?. AMD neither learns from its failures nor its successes; just like the integrated memory controller was the right technical way to go, the torrenza socket graphics coprocessor is the right way to go; to not pursue this ATI acquisition synergy is just to give chances to Intel and nVidia to do it first. Fusion? DON'T GET ME STARTED!