Megamergers—and Megafallacies

Friday, April 30, 1999

The landscape of corporate America has been permanently altered by the wave of mergers and acquisitions that has swept through nearly every industry. In the past year alone, we’ve seen the largest telecommunications merger in history, followed by the largest financial services merger in history, followed by the newest, largest telecommunications merger in history.

Yet many observers are missing the real story. The focus on size alone—the largest this, the biggest that—has obscured what will be the more enduring legacy of the megamergers of the late 1990s, namely, the incorporation of the best management techniques from around the world in the first truly global companies. The lesson today: Bigger isn’t better; better is better.

Illustration by Ismael Roldan

The mergers of today bear little resemblance to their predecessors of the last decade. Hostile takeovers have been replaced by friendly combinations. Leveraged buyouts made possible by issuing mountains of debt have been replaced by the exchange of equity made possible by booming stock markets. Corporate raiders taking over the boardroom have been replaced by cochairmen jointly running the combined company.

Consider the marriage of Chrysler Corporation and Daimler-Benz. Yes it is the largest (forgive the term) industrial merger in history. But the success of this combination won’t be based just on the economies of scale that come from size.

The new company, Daimler Chrysler, will feature not just product synergy but management synergy, with the leaders of the two companies initially sharing the title of cochairman. Each company plans on taking the best ideas from the other to form a potent mixture of American entrepreneurial management and German engineering, with the best practices from Japan thrown in. The result will be not just a pooling of assets but a pooling of management skills.

Chrysler, for example, has mastered the art of being a low-cost, high-quality auto producer. To achieve that efficiency, Chrysler pioneered a new method for dealing with suppliers. Under this innovative new type of relationship, Chrysler and its suppliers work together to achieve cost and quality goals. Suppliers are encouraged to suggest change and reinvent products to improve quality and make them more appealing to consumers.

Profitability in the future will come not just from eliminating redundancies but from combining excellence.

Chrysler has also earned a reputation for developing a less structured, less bureaucratic approach to car design, engineering, and manufacturing. The first Dodge Durango—Chrysler’s entry into the full-sized sport utility vehicle market—rolled off the assembly line in a mere twenty-three months, thanks to an integrated development team composed of people from design, engineering, and manufacturing. That quick turnaround helped Chrysler head off competition from popular new models like the Ford Expedition and maintain its leadership in the highly profitable sport utility vehicle market.

The name Mercedes Benz has always been synonymous with engineering excellence. Daimler, for instance, was a leader in the development of advanced technology air bags and proenvironment fuel cell technology. Chrysler’s short product development cycles will complement Daimler’s preeminence in engineering technology, allowing the combined Daimler Chrysler to bring new cars to market faster than ever.

A similar dynamic is at work in the recently completed merger between MCI Communications and WorldCom. Rather than a boardroom brawl, the two companies have combined their respective managements into a stronger team. MCI’s chairman, for example, will serve as the head of the combined company, while WorldCom’s founder became president and CEO.

But the real value added from this combination comes from the strategic vision MCI WorldCom will pursue. The new company plans to combine local phone networks with long-distance networks to form the first end-to-end communications transmission system, along with a strong Internet service. The result could be the world’s premier network for data and voice transmission.

American companies have gone through years of sometimes painful restructuring to become lean, efficient leaders in the world’s most important industries. They have reached the point where cost savings alone will not justify strategic business combinations. As these mergers demonstrate, in the future enhanced profitability will come not just from eliminating redundancies but from combining excellence.