[A-List] New economy bull
Michael.Keaney at mbs.fi
Fri Mar 1 03:57:49 MST 2002
The siren plea for uncreative destruction: Silly incentives, lousy
Financial Times; Feb 25, 2002
By JOHN PLENDER
Goodwill seems a rather odd word to describe the thing that companies
are writing off with such monotonous regularity after the 1990s
acquisition spree. Hot air might be a better description. A new survey
by KPMG Consulting suggests that many cross-border takeovers launched in
the bull market have been disastrous, which is just what readers of most
other surveys would have expected.
It has been fashionable to regard takeovers as an instrument of creative
destruction . Yet the market in corporate control has been a veritable
graveyard for the aspirations of US and British managers - witness
Marconi, Tyco, ICI et al. Accounting apart, nothing very creative was
going on in the late 1990s, while a great deal of shareholder value was
being destroyed as managers overpaid for acquisitions.
Now that the extent of this corporate catastrophe is becoming clear,
will there be an end to further value destruction ? Only in the short
term. Whitehall seems to think a market in corporate control constitutes
some kind of systemic advantage and that the loss of the European
takeover directive is a disaster for the European Union.
The vested interests at the top end of the City food chain in favour of
frenetic takeovers are also very powerful. Meantime, the capital market
incentives ensure that managers are anxious to keep the City in fees.
Former investment banker Tony Golding perfectly captures the psychology
in a recent book * where he explains how investment institutions and
analysts over-identify companies with their chief executives and then
make exorbitant demands of them. A new manager confronting a difficult
situation is usually given a grace period of 18 months before hard
evidence of improvement is expected. The maximum time horizon, adds
Golding, is three years.
Most large businesses are too complex to be turned round in that time.
So who can blame managers, heavily laden with stock options, from
heeding the siren call of the investment bankers who propose a
"transforming" takeover? Even if it wrecks the balance sheet, the
manager still receives a reward for failure.
The problem is not with the principle of a takeover market - merely that
the incentive structure is so warped that takeovers have become a
serious hazard. Shame the institutional shareholders are not more
exercised about it. What a way to invest our pensions.
*The City: Inside The Great Expectation Machine, Financial
Times-Prentice Hall, 2001.
Full article at:
Mercuria Business School
michael.keaney at mbs.fi
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