Land of the Giants

Forget the accounting scandals, the CEOs fending off fraud charges, the churning stock market. The business world has become obsessed with corporate nuptials. Merger mania is back, executives are cashing out and, if history is any guide, investors should be running for cover. A couple of months ago, Kmart and Sears got engaged. Then Nextel and Sprint announced their $35 billion wedding. Johnson & Johnson is buying Guidant, a maker of medical devices, for $24 billion. Two of the splashiest deals came last week: SBC, the Baby Bell based in San Antonio, Texas, looked poised to swallow its former parent, AT&T, in a deal that could top $15 billion. Then Procter & Gamble said it would acquire Gillette for $57 billion, forging a consumer-products giant with brands ranging from Gillette's Right Guard deodorant and Mach3 razors to P&G's Crest, Pampers and Tide.

For all the talk of profits and synergies, investors would be wise to view these deals with a wary eye. Blockbuster mergers tend to be duds for stockholders of the acquiring company. In seven of the nine mergers valued at more than $50 billion, the acquirer's share price is down an average of 46% from premerger levels, according to FactSet Mergerstat, a research firm in Santa Monica, Calif. Maybe you already knew that if you're a longtime owner of Hewlett-Packard, whose stock has flatlined since the company acquired Compaq in 2002. AOL's merger with Time Warner (parent company of TIME) may have set a new standard of paired futility, erasing some 80% of the merged company's stock value. After the hype subsides, more often than not, investors wind up with tax write-offs.

Yet that hasn't slowed the latest blitz of deals. December 2004 saw $147 billion in mergers vs. $41 billion a year earlier, according to Thomson Financial. In January an additional $150 billion worth was announced. A recent survey by Bank of America Business Capital found that 23% of chief financial officers expect to do a major deal this year.

Why the shopping spree? In part, it's a self-perpetuating cycle. Once a few big companies in an industry join forces, everyone else feels compelled to hook up. (In consumer products, the betting now is that Kimberly-Clark and Colgate will be next.) The buying binge is also being fueled by rising stock prices--and the loads of cash piling up on corporate balance sheets. The S&P 500 is up 40% from its 2002 low, and companies in the index are sitting on $2.3 trillion in cash. Writing dividend checks is one way to spend the largesse. Microsoft paid $32 billion in dividends last year, and dividends are expected to rise 10% on average this year. Many executives, though, are cracking open the piggy bank and looking for acquisition targets. P&G, for instance, is using its stock to acquire Gillette, but it also plans to spend up to $22 billion to buy back shares to support the merged firm's stock price.