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When Dinosaurs Embrace

When all else fails, you can always merge. That seems to be the message behind Federated’s $11 billion acquisition of May Department Stores. These are two struggling businesses in a moribund industry: for more than a decade now, department stores have been getting creamed by the likes of Wal-Mart and Target on the low end and specialty retailers on the high end. It’s death in the middle. This desperate embrace of the deeply troubled reminds me of HP’s acquisition of Compaq — a combination of two sick companies to create a bigger sick company. (Sun’s Scott McNealy hilariously described that deal as “the slow-motion collision of two garbage trucks.”) And now we all know how that turned out. Why should we expect this mating to be any happier?

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For perspective, check out the work of Mark Sirower, a student of mergers whose book, “The Synergy Trap”, is a rigorous critique of the whole M&A game. Essentially, he shows that two-thirds of all mergers actually succeed in destroying shareholder value.

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