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Why mergers LOSE money, but are GOOD for the economy

Takeovers never deliver... and disties are no different

3: Reinventing the wheel

Imagine a company that is making shedloads of money, but the business isn't really going anywhere. Give it 15 years and we're pretty sure that not only will there not be any profits, there won't be a company anymore. The market niche pumping out those vast rivers of profit will just have vanished. Think about - oooh, I dunno - a buggy whipmaker in 1910. Or the near-monopoly producer of desktop operating systems and productivity suites in 2012.

There are two things that could be done. One is to frantically thrash around trying to find some new business to replace the old... Go into making leather seats for the newfangled cars, for example. Try buying a VOIP phone company. Or snap up a search engine.

It's possible that these new adventures will boost the shareholders' long-term income. But that's not the way that the economists usually bet. The management of the firm doesn't have anything special to add in these new areas. The shareholders themselves are just as capable, in fact probably more so, at picking the new winners if they just had their profits returned to them to invest themselves.

There's an argument that the current opportunity should just be sweated for the cash it can make and damn the "future new lines of business". There's nothing special about the existence of a particular company, so suck out the money, send it back to the owners and let them do as they wish. But this particular line of thinking isn't, of course, what the management of the company wants to hear. And they most certainly hate doing it - even if they ought to.

Here's an interesting thought experiment. Do you think that Microsoft shareholders would have been (or even will be) better served by the company just sweating out the remaining years of the Windows/Office franchise? Or do you think the firm did well to buy Skype, build Bing, create Surface and Windows Phone and all the other new products? Given the vast amounts of cash thrown off by that franchise, it's not even a close call. Continue to develop them, yes, but send all the rest of the profits back out as dividends is the obvious winner, I would have thought.

4: Ultimately, it's good for the economy

The final one of the four is the vital part that takeovers play in the clean up of the economy's failures. Take a company that goes bust. The whole point of bankruptcy proceedings is to make sure that its assets aren't then left, orphaned, or chained to an unpayable debt. The idea is to get them off into someone else's hands where they might be put to good use. This is true of contracts, or the workforce, of the land and any other asset. It might be that the machinery is worth most as scrap. Or the factory is worth most as a supermarket. Or it could be that the OS coders and their desks would be best put to writing games: but under different management.

And it's this last part of the whole system that our economists think is the most important. When failure happens, the vital thing is to clean up the mess and quickly. Don't leave potentially useful assets orphaned but auction them off and get them working again. The price that is realised doesn't matter very much at all: from the view of the entire economy, getting people and assets back to work pronto is the vital part. So important is this that we're urged to overlook all of the above problems with takeovers and mergers to allow this part of it to function as efficiently as possible.

Yes, most takeovers lose money for the shareholders of the company doing the buying. This is often because the interests of the management diverge from those of those owners. Similarly, many companies are kept running longer than they should be for those selfish management reasons. But we put up with all of that (although try to constrain it) so that the scavenging upon the assets of the bankrupt can be as efficient as possible. For this is the very heart of the success of capitalism: Not how the successful make profits, but how the system deals quickly and cleanly with failure.

As to which of these various models best describes the current activity in the distribution channel: well, we've all our own thoughts and none of us are going to publish them without consulting m'learned friends. Or at least I'm not.... ®

*Well, we assume, being humanoid at least, that they have them.

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