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Critics of mergers and takeovers, on the other hand, charge that hostile consolidations disrupt management and force companies to think mainly of short-term profits rather than of how to become more effective competitors in U.S. and foreign markets. Even the short-term run-up in stock value that frequently occurs in merger situations may not be to the long-term benefit of a company, since it may overstate the firm's actual worth. Martin Lipton, a Wall Street lawyer who specializes in helping companies defend themselves against raids, denounces them "as financial transactions for the profit of the takeover entrepreneurs." He adds sharply, "They do not create jobs. They do not add to the national wealth. They merely rearrange ownership interests and shift risk from shareholders to creditors." Concurs Peter Jones, retired senior vice president of Levi Strauss and now an instructor at the University of California, Berkeley: "While we in America devote a major part of our material and human resources to promoting and fighting mergers and hostile takeovers, we are becoming less and less competitive with Japan and all the new Japans."
The growth of debt to finance mergers, takeovers and other moves is perhaps the most dangerous side of the recent rush to consolidate. Federal Reserve Chairman Paul Volcker has warned that the borrowing is not "compatible over time with economic and financial stability." Warren Buffett, an investor with large holdings in Capital Cities and other firms, is blunt: "One day junk bonds will live up to their name." Many economists and businessmen believe that the U.S. cannot have a strong economy if it is based on companies burdened by too much debt.
The record of past big mergers is not very encouraging. In a study of acquisitions made between 1974 and 1982, Swarthmore Economist Frederick Scherer found that 40% failed to last. Some major deals made over the years turned into king-size turkeys. Gulf & Western, once among the largest and most acquisitive conglomerates, has sold in the past three years some $3.5 billion worth of properties acquired during the 1960s and '70s. These range from a cigar company to a former site of Madison Square Garden in New York City. Says Chairman Martin Davis: "I just don't think you can manage all these businesses well." The ITT conglomerate that Harold Geneen put together in the 1960s is also being dismantled.
Even if mergers are by and large beneficial to the U.S. economy, however, the current merger frenzy seems to have gone too far. Takeover strategy is taking up vast amounts of management's energy and attention. Instead of running their businesses, some executives are spending their time worrying about financial plays. Says Berkeley's Jones: "As considerable as is the drain of money and other resources into mergers and acquisitions, I regard the drain on management time and talent as perhaps even more important."
Ultimately, of course, each merger or takeover or leveraged buyout must be judged on its own merits. There are good mergers, and there are bad ones. The true danger of the current rash of mergers is that it will distract corporations from the real business of business. American firms, facing ever tougher competition both at home and abroad, need to look beyond the short- term search for a merger partner or takeover target and get back to making products and services for tomorrow's customers.