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Monday, March 03, 2008

Merger Meltdown: $29.5 billion!

That is the amount Sprint Nextel wrote down in the fourth quarter largely because of the failed melding of Sprint and Nextel Communications three years ago. It turns out the merger news release headline touting the “unmatched asset mix” was an unusually prescient investor warning: the companies have struggled mightily merging their technologies, according to the New York Times.

Another dozy from the merger’s announcement: “We will have the resources to develop and deploy compelling, differentiated services by unleashing the combined strengths of the two companies, each of which is recognized as a product and network innovator. This is a pro-competitive combination that will provide customer choice and create exciting new opportunities for all of our constituencies."

Guess what? All that unleashing did indeed spark lots of customer choice. Sprint Nextel expects to lose 1.2 million subscribers this quarter and possibly more in the second quarter. It lost more than 1 million customers in 2007.

Sprint Nextel’s write down comes just weeks after Alcatel-Lucent’s staggering $3.8 billion write-down relating to the merger of Alcatel and Lucent just one year ago. According to the Wall Street Journal, Alcatel and Lucent “underestimated the cost of ripping out and replacing customers' old equipment as it combined two overlapping product lines.”

Here’s what’s bothering me: Media stories announcing mergers dutifully mention the investment bankers involved in the deals, often a quid pro quo for the bankers leaking news of the deals in the first place. But when problems with these deals begin to surface, there is nary a mention of the investment bankers responsible.

So what exactly do investment bankers do to warrant the tens of millions of dollars in fees they command? For starters, one would expect that as part of their due diligence reviews they help determine whether there might be formidable problems merging the operations of competing technology companies. Okay, maybe it’s unreasonable to expect them to understand the underlying technologies of their clients. They might also be expected to gauge whether the managements responsible for making the deals work have the requisite competence, but you know what they say about biting the hand that feeds you.

The sad truth is that no one really knows exactly what value investment bankers add because the reality is that ultimately they don’t really add value. As Andrew Ross Sorkin noted in his column last week, it’s generally taken as a given that most mergers fail. So it really doesn’t matter what investment bank conducts an M&A due diligence review because all the optimistic assumptions invariably prove to be wrong anyway.

As an aside, I don’t understand the obsession over the so-called League Tables, which focuses on which investment bankers do the biggest or the most deals. A more valuable table would be the investment banks responsible for doing the worst deals. As a public service, I’ve put together a representative list:

1991: AT&T and NCR Corporation

Goldman Sachs and Dillon Read advised NCR and Morgan Stanley advised AT&T

1998: Daimler-Benz and Chrysler

Goldman Sachs and Deutsche Bank advised Daimler-Benz and Credit Suisse First Boston advised Chrysler

1999: Mattel and The Learning Company

Goldman Sachs advised Mattel and Merrill Lynch advised The Learning Company

2001: AOL and Time Warner

Salomon Smith Barney advised AOL and Morgan Stanley advised Time Warner

2001: Hewlett-Packard and Compaq

Goldman Sachs advised HP and Salomon Smith Barney advised Compaq

2005: Sprint and Nextel

Lehman Brothers Inc. and Citigroup Global Markets advised Sprint and Goldman Sachs & Co., Lazard Freres, and JP Morgan advised Nextel

2006: Alcatel and Lucent

Goldman Sachs advised Alcatel. And JPMorgan and Morgan Stanley advised Lucent



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