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Merger Meltdown

The voracious corporate appetite for mergers in recent years has caused a bad case of indigestion for mega companies like AOL Time Warner, DaimlerChrysler, and J.P. Morgan Chase. Do these partnerships add up to less than the sum of their parts?

The merger monster that threatened to swallow the world two years ago is dead.

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In the first five weeks of 2000, merger mania got so hot that more than $500 billion worth of merger deals were announced. Just two years later, Thomson Financial reported that global merger-and-acquisition activity for the first quarter of 2002 totaled $89.2 billion. It was the first time since 1995 that the quarterly figure had not blown past the $100 billion mark, a milestone achieved in any one of those first five weeks of 2000.

During that seven-year run of corporate consolidation, an armchair observer couldn’t help thinking that the entire global economy would soon lay firmly in the grasp of two, maybe three, worldwide conglomerates.

As it turns out, yesterday’s fairy-tale corporate romances have become today’s Fatal Attraction, marked by messy cultural clashes, crippling cash hemorrhages, and stock prices that even rivals admit are undervalued.

Here, we take a thermometer reading of three companies formed during the wave of mega mergers that swept through in recent years.

AOL Time Warner

This merger had it all: the thrill of victory for the new economy, the agony of defeat suffered by the old economy.

When AOL announced plans to devour Time Warner — a global media empire and an enduring symbol of a bygone era of business — the question du jour quickly became, How can Time Warner keep up with AOL?

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Fast forward two years, and the question remains the same — it’s just the companies that have switched places. In the past nine months, Time Warner released a pair of blockbusters — the Harry Potter and Lord of the Rings movies — while AOL struggled to gain its footing amid a 31% drop in revenue.

AOL Time Warner originally promised shareholders that they would see 25% annual earnings growth. The company has since changed its tune, revising the figure to a pace of 5% to 9%. In addition, the company’s stock has plunged 60% since the merger closed, while the management team has been shaken up more times than a snow globe at Christmas.

AOL still has plenty of bright spots, as George Anders explains in the July 2002 issue of Fast Company, but the world has learned that the road to global media domination is full of peril.

DaimlerChrysler AG

The fact that the German “AG” — rather than the U.S. “Inc.” — is tacked on to the end of this company’s name sheds light on but one of the many challenges this automotive behemoth has faced since announcing its historic, transcontinental $36 billion merger in 1998.

Jurgen Schrempp called the deal to bring Daimler-Benz and Chrysler together a “wedding made in heaven” at the time, but Schrempp’s tenure as CEO of DaimlerChrysler has been hell ever since. In 2001, the company lost $2.5 billion, and the stock has taken a nosedive from the triple-digit peak it reached shortly after the deal was consummated. To make matters worse, Auburn Hills and Stuttgart boast a relationship only slightly warmer than that of Washington and Baghdad.

The company scored a victory (sort of) on April 25, though, when it announced that it turned a modest profit — its first in the past six quarters. And one beacon that could light the path to synergy comes in the form of the new Chrysler Crossfire, a model scheduled for release in mid-2003 and aimed at generation Y that drew heavily on the company’s collaborative strengths. In addition, Chrysler says it may save up to $100 million in future development costs by cloning the Mercedes gearbox to put in its sedans.

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J.P. Morgan Chase & Co.

Chase Manhattan bank purchased its Wall Street neighbor J.P. Morgan for $33 billion in December 2000. At the time the deal was announced, many wondered how the two differing cultures would mesh — Chase playing the part of the streetwise new kid on the block, with J.P. Morgan fitting the stereotype of a rarefied old-world bank.

While CEO William B. Harrison Jr. vigorously defends the wisdom of the merger at every turn, critics charge that the banks’ differing cultures have caused more than just morale problems. Many say the clash of styles has filtered into the executive suite, making for a lackluster business strategy that fails to live up to the company’s potential.

In the two years since the J.P. Morgan-Chase deal went down, the company’s share price has lost a third of its value and currently lags 25% behind other financial stocks. Admittedly, the company has taken some hard hits in recent months: Not only did it get entangled in several deals with Enron, but it also boosted its lending to the telecom sector just before that industry crashed and burned.

Ryan Underwood (runderwood@fastcompany.com) works on the Fast Company Web team. Learn more about AOL Time Warner, DaimlerChrysler, and J.P. Morgan Chase on the Web.