Mergers bad business says New Yorker writer

Industry e-zine Paid Content celebrates its sixth birthday this week by biting the hand that feeds it. Deals and the rumors of deals are its stock in trade so kudos to the Content-meisters for touting the New Yorker’s skeptical assessment of CBS’s acquisition of CNet. Financial columnist James Surowiecki uses this media deal as a case in point to remind readers that:

corporate marriages only rarely end in bliss—many studies have found that most mergers and acquisitions do little for the acquiring company’s bottom line. A KPMG study of seven hundred mergers found that only seventeen per cent created real value, and that more than half destroyed it. And a McKinsey study of mergers that took place in the nineteen-nineties found that less than a quarter generated excess returns on investment.

Why then does the Wall Street Journal introduce many mergers with details leaked by people close to the deal who violate their legal duties of confidentiality? And when the Journal gets a so-called scoop of this sort does it thank the leaker by soft-pedaling criticism? Or is there some other explanation for fawning coverage of deals that so often go bust?

In a variation on Surowieki’s theme, I once wrote about how publicity helped create a frenzy for initial public offerings (IPOs). I quoted Yale University economist Richard Shiller, who dedicated a chapter of his book, “Irrational Exuberance,” to how the press invented financial euphorias. The article quotes him as saying:

I don’t think there were any bubbles until there were newspapers,” said Shiller, whose research went back to the Dutch tulip bulb craze of the 1630s.

Imagine that. Extra, extra, read all about it! Newspapers invent hype! Hollywood lives for hype. Economists understand that “the (film) distributor earns most of its revenue over the first two or three weeks of the movie’s screen life.” The publicity blitz in advance of a new movie is intended to get viewers into this three-week window. Of course Hollywood thanks the media with generous advertising.

Surowiecki is known for his observation that public — or rather niches within the public — often have greater collective expertise than the so-called experts, which concept is captured in the book title, “Wisdom of the Crowds.” The crowds will need all the wisdom they can muster because mass media often seems intent on selling its audience a bill of goods.