Deals That Work; With the world caught up in merger mania again, studies suggest fewer tie-ups will fail, this time.

Byline: Karen Lowry Miller

No question, merger mania is back in the news. In a deal first broached five years ago, Alcatel is buying Lucent this month for $13.5 billion. AT&T has bid $83.4 billion for BellSouth, and Mittal Steel is offering $23.7 billion for Arcelor. Dealogic says that, worldwide, announced M&A deals totaled $931 billion in the first quarter this year, the highest level since the last merger wave peaked in late 1999 and early 2000. CEOs are embracing for the cameras as their bankers celebrate--but is the joy likely to last?

You wouldn't think so, given past performance. Study after study has shown that 60 to 70 percent of mergers fail, meaning that the stock price falls months or years after the deal is done. If the new string of deals proves to be a true "wave" (one in which the dollar value of mergers rises at an accelerating rate), it would be the sixth since the turn of the 20th century. During the wave that ended in 2000, says Dutch M&A scholar Hans Schenk, $9 trillion worth of mergers in the United States and Europe destroyed so much wealth that they effectively reduced the size of these giant economies by 3.5 percent.

So why are companies still so attracted to one another? New studies suggest that more and more mergers are actually working, due to more careful selection, pricing and scrutiny of possible targets. Consultants Towers Perrin noticed that its corporate clients seemed to be doing their homework and asking harder questions, says Marco Boschetti, head of the firm's M&A practice. He asked the Cass Business School at City University in London to run the data, and it tracked 83 representative mergers (out of thousands completed) in 2004 for six months before and six months after the deals were done. In the first big study of the current rise in mergers, released this month, Cass found that the average share price of the acquiring companies beat a broad measure of global stock-market performance, the MSCI World Index, by 7 percentage points. That compared very favorably to 1998, when acquirers lagged the index by 2.5 points, and 1988, when they lagged by 6 points. Moreover, 67 percent of the deals done in 2004 drove share prices higher, apparently upending the conventional wisdom that most mergers are doomed to fail. "My sense is that some pretty hard lessons have been learned," says Scott Moeller, director of executive programs at Cass.

The Cass study looked at deals worth $400 million to $1.5 billion. Critics say this focus could tend to skew the results, in part because such medium-size deals historically outperform megadeals. Some of the recent winners include Yahoo's $475 million purchase of Kelkoo, Harrah Entertainment's $1.45 billion acquisition of Horseshoe Gaming and Genzyme's takeover of Germany's ILEX Oncology for just under $1 billion. Moeller, however, says bigger deals (those worth more than $1.5 billion) did even better in ' 04. The 40 deals in that class--including FedEx's purchase of Kinko's, SoftBank's buyout of Japan Telecom and Wachovia's acquisition of SouthTrust--outperformed the MSCI index by 18 percentage points on average.

So stock markets have learned to embrace mergers, particularly large ones, at least for six months. Does that mean the deals are wise? Towers Perrin looked at measures other than stock price, including return on equity and return on assets, and found that megadeals actually performed quite poorly. ...