All Together Now?(The Talk of the Town)(CBS-CNET Networks merger)

These aren't great times for CBS. It's no longer the network ratings champ; its radio business is dragging; and a recessionary economy is bad news for a company dependent on advertising revenue. So it isn't exactly surprising that the company felt it needed to do something dramatic. What's surprising is that it has chosen to shell out almost two billion dollars to buy CNET Networks, a venerable but not very profitable Internet company. Both companies' executives promised that the deal made perfect strategic sense. It turns CBS into a "top-ten presence" on the Net, giving it access to those eighteen-to-thirty-four-year-olds whom advertisers love, and it allows for cross-promotional opportunities across myriad media. CNET's C.E.O., Neil Ashe, claimed that it will make the two companies "bigger, bolder, and better than we could be apart."

That's what they all say. In fact, 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. Perhaps CBS's experience will be different, but shareholders clearly don't think so. The day the deal was announced, the company's stock price fell by almost two and a half per cent.

Investors are right to be skeptical. To begin with, the logic of the deal depends on the myth of synergy, an idea that appeals to executives' sense of themselves as magic-workers. As Warren Buffett once put it, executives see the companies they acquire as handsome princes imprisoned in toads' bodies, awaiting only the "managerial kiss" to set them free. Unfortunately, most toads turn out to be as warty as they look, and magic kisses are harder to bestow than executives think. Only a few companies today--G.E. and Cisco come to mind--have been consistently able to take acquired firms and improve their performance and profitability.

Merger mania also rests on what you might call the fallacy of ownership--the assumption that you have to own a company to make money from its properties. In fact, much of what mergers are supposed to accomplish can be achieved through partnerships and alliances. Google has made deals to handle searches and advertising for companies like A.O.L. and I.A.C., giving it access to their customers without the hassle of an acquisition. And I.B.M. has, in recent years, marketed the products of its competitors Sun Microsystems and Novell, enabling it to expand its offerings and its potential customer base. If CBS and CNET had simply agreed to cross-promote each other's brands and distribute each other's content, CBS would have had many of the benefits of merging without the costs.

There are, of course, situations ...