In his 1997 Chairman's Letter to the Shareholders of Berkshire Hathaway Inc., Warren Buffett wrote,
In some mergers, there truly are major synergies--though oftentimes the acquirer pays too much to obtain them--but at other times the cost and revenue benefits that are projected prove illusory. Of one thing, however, be certain: If a CEO is enthused about a particularly foolish acquisition, both his internal staff and his outside advisors will come up with whatever projections are needed to justify his stance. Only in fairy tales are emperors told that they are naked. (February 27, 1998, p.17)
Buffett's admonition, given in the midst of an unprecedented merger wave (Pitofsky, 1999, para.3) and at a time when the investment community was panning him for rejecting technology ventures (Dominio, March 2000), was an auger of things to come. The year 1998 saw the US$37 billion merger of WorldCom and MCI Communications, which then merged with Sprint in a US$129 billion deal, (Wikipedia, 2006) and the CDN$9.9
billion purchase of Bay Networks by Nortel. Both proved to be ill fated. MCI WorldCom declared bankruptcy a few years later and was purchased by Verizon for a mere US$7.6 billion. Nortel continued to purchase other companies at a frenzied pace but by 2005 had to make major accounting write-downs to disclose that the companies they bought were now worth only a fraction of their purchase price (CBC News Online, December 2005). Not all the mergers and acquisitions during that time were unsuccessful - Toronto Dominion's purchase of Canada Trust, for example - but Buffett's estimation that many mergers were not approached with any critical thought certainly proved to be true.
This paper will look at some of the sound and questionable reasons for mergers and acquisitions. In addition, it will examine the impact of...