Large mergers don’t normally work, and the shareholders are more often than not left holding the bag, says Fortune magazine. Why? Because most of the time the companies have to do better than they already are in terms of earnings and profit growth and corporate efficiencies in order to justify the price tags. They back up this claim with some hard data from financial consulting firm, Stern Stewart & Co. For instance, for Symantec to justify the price of the Veritas takeover – $13 billion – Symantec must figure out a way to raise Veritas’ operating earnings from $350 million in 2004 to $1 billion, a growth rate of 24%. (Can you hear me cracking up about that?)
So what about the two big telecom deals – SBC & AT&T and Sprint-Nextel? Sprint offered tiny premium for Nextel’s shares which were trading at around 10 times earnings. In case of SBC, they offered no premium at all. Even if AT&T managed to hang on to its current profit – $1.18 billion, the shareholders are not going to lose money. They do better, they make money for shareholders. In case of Sextel, Nextel would have to grow its operating earnings by 7% or so – in other words, its quite doable.