This endless urge to become the biggest recalls the old line about second marriages: the triumph of hope over experience. Herb Kelleher, who built Southwest Airlines into the nation’s most successful–but only seventh largest–air carrier calls it “corporate elephantiasis.” For those of you who lack a medical degree, elephantiasis is huge, abnormal tissue growth. “You may have bigger genitalia than anyone else, but they also can hurt an awful lot,” he quipped at a Society of American Business Editors and Writers dinner last week. “We’ve never been focused on gigantism” at Southwest, he said. “We’ve focused on being the best.”
By contrast, many companies try to grow via big acquisitions. These deals are seductive, because you get lots of favorable ink and a love buzz from Wall Street. You also buy time to implement your strategy, if you actually have one, because year-to-year financials aren’t comparable and outsiders can’t analyze your results.
WorldCom is a classic case. Chief executive Bernie Ebbers–make that former chief executive Ebbers–wanted his grandly named enterprise to be the nation’s biggest telecom firm. He got up to No. 2 by making about five dozen acquisitions. But when the takeover music stopped two years ago after regulators nixed his proposed purchase of Sprint, it became clear the company was a mess. Bye-bye, Bernie. And with WorldCom stock down 95 percent from its high, bye-bye to $100 billion of shareholder wealth.
Which brings us to AOL Time Warner–which, of course, owns Time magazine, the primary competitor of NEWSWEEK. It’s been a great deal for old America Online shareholders, even though the combined company currently sells for less than AOL alone used to fetch. Here’s why. AOL paid 1.5 shares for each Time Warner share. On Jan. 10, 2000, when the deal was announced, this translated into $110.63 of stock for shares selling at $64.75. Since then, AOL is down 75 percent. But everything is relative–the average surviving Internet stock is down well over 90 percent. Then again, none of them used high-priced stock to buy a huge Old Economy business the way AOL did.
Meanwhile, old Time Warner holders have taken a haircut. Heck, they’ve been totally scalped. The AOL stock they got is worth $27.08, down 42 percent from the presale price. That’s more than double the average decline of the seven media companies the old Time Warner used as benchmarks. Unlike WorldCom, where the strategy seems to have been to amass as much bulk as possible, AOL Time Warner makes some business sense. Time Warner would get a ready-made Internet strategy, AOL could use Time Warner’s cable systems to deliver broadband services. Alas, it turns out that despite collecting all those millions of monthly fees, AOL depended heavily on advertising from Internet companies which has vanished along with the stock bubble. AOL may someday get its act together. But it sure hasn’t done it yet.
And, finally, to the new Hewlett-Packard. Much as I hate to subscribe to the conventional wisdom, the HP-Compaq combo has a disastrous feel about it. And that’s without recounting the sorry history of Compaq’s own big acquisition, Digital Equipment. Or mentioning that persuading Wall Street to override the opposition of the Hewlett and Packard families is a walk in the park compared with making this deal work. The thesis is that you can transform two dinosaurs into a nimble new beast that can outrun and outfight the velociraptors at Dell Computer. It probably won’t be pretty. But it will certainly keep us business journalists employed.
