Converging on risk aversion

When Hewlett-Packard (HP) first announced, in 2001, its intention to take over Compaq, its shares dropped 18 percent within a day. That proved the worst initial share price collapse in the history of major mergers in the Western world.

Because a key market for the two companies PCs had peaked, analysts everywhere ridiculed the deal between HP and Compaq. In addition, a resentful HP family member, Walter Hewlett, took HP chief Carly Fiorina to court for flouting the venerable Californian company’s traditions. Fiorina, previously the toast of Wall Street, only just survived.

Today, the worldwide market for PC has declined for the fifth successive quarter, and the merged HP is struggling. Preliminary data on the second quarter of 2002, from the technology forecasters IDC, show that while the new HP leads the worldwide PC market, sales fell 16.2 percent, year on year, against a market decline of only 0.5 percent. Now they are combined, HP and Compaq have seen their market share drop catastrophically ­ from 17.9 to 15.1 percent ­ in the space of a year. By contrast, Dell remains the market leader in the USA, and has increased shipments there and in all major international markets (1).

At first sight, the fate of the new HP seems to confirm the conventional wisdom that mergers have had their day. The number and value of mergers on the world economy has fallen dramatically, even though it remains high by historical standards. ‘Synergies’ between companies, much vaunted in the past, are now sneered at. In pharmaceuticals, Pfizer’s $53billion bid for Pharmacia has elicited a barrage of scepticism from stock-market analysts. In media, the architects of both Vivendi’s and Bertelsmann’s acquisitions have been deposed.

How times change! Since the mid-1990s, mergers and acquisitions have been the primary and complacent locus classicus for capitalist ‘innovation’. In 1999, when Vodafone took over AirTouch Communications, Inc in the USA, for $61billion, it was then the largest cross-border takeover ever, and commentators were ecstatic. And when AOL bought Time Warner for £105billion in 2000, the deal was hailed by nearly every expert.

But now mergers are mostly thought to be Bad News. From Enron to WorldCom, they spell corruption and funny business. There is more and more debate about whether big companies can survive at their current size, and even Microsoft has indicated that it does not want to encourage another anti-trust vendetta by appearing too predatory.

In the sector that was once celebrated as TMT (Technology, Media, Telecommunications), mergers used to have an extra appeal. Apart from the usual opportunity to make thousands of workers redundant, the idea was that industries as varied as broadcasting, publishing, computers, telecommunications and consumer electronics were bound to ‘converge’ with each other on the basis of digital technologies.

As early as 1982, in his best-selling book Megatrends, the American futurologist John Naisbitt pronounced: ‘the combined technologies of telephone, television, and computer have merged into an integrated information and communication system’ (2).

Again, how times change! When HP got together with Compaq, there was no discussion about how HP’s printers might be teamed up with the latter’s iPaq handheld devices to allow us to print things on the move. When AOL chief Robert Pittman realized his time was up and that the old Time Warner staples of People, Time and Sports Illustrated were in the ascendant, the Financial Times leader chortled that it was ‘another nail in the coffin of the theory of convergence between media and online businesses’ (3).

More recently, the FT’s Peter Martin, one of its most incisive and authoritative figures, urged telecoms companies that have invested in ‘3rd Generation’ mobile internet systems ­ convergence red in tooth and claw ­ to ‘think the unthinkable: turn off 3G’ (4).

Should we greet these developments as a sensible sobering-up about commercial mega-deals and technical convergence? Should we revel in the current plight of Vizzavi, Vodafone and Vivendi’s joint, £1billion cash-burn attempt at mobile internet portals? I believe not.

The real convergence is between short-termism and risk aversion on the stock markets, and a climate among corporate managers and media commentators that is, however much they regret it, inimical to innovation. In 2002, pursuing any significant technological bet is likely to be regarded as potentially a madcap scheme, and one only made worse if the scheme is on a global scale. Even a relatively conservative bet nowadays, such as combining two existing technologies like mobile telephony and the internet, is seen as financially irresponsible.

Working at Philips Consumer Electronics in the mid-1990s, I found out the hard way how difficult it was, on the supply side, to achieve the ‘convergence’ of different media technologies inside even a single multinational ­ let alone between companies. Warring business units, tight budgets and rival plans for product development made sure of this.

The forces of internal competition were very much on the same scale as those at AOL Time Warner. Even then, Philips showed its disregard for convergence by selling off Polygram, its music arm, much as British Telecom chairman Sir Christopher Bland, previously chairman of the BBC, has repudiated any move into content and broadcasting.

So the effect of market forces on the supply side, inside the modern firm, is often to make for barriers to technological convergence. In the case of mergers this is not so much a case of clashing cultures, as we are told, but rather of competing profit centres. But it was also clear to me at Philips that, in terms of the demand side, consumers confronted a whole plurality of differently branded and technically incompatible devices ­ and in particular, the PC and the TV. The nature of our private enterprise system and of competitive rivalry between firms ensured that there was no convergence there, either.

No wonder that, in a little-noticed report just after the AOL Time Warner marriage, the Wall Street Journal had words to the effect that even, er, converging the consumer’s AOL bill to line up under his Home Box Office bill would take at least two years to achieve.

But we now know that Internet Protocols do provide some basis for convergence between different computer and telecommunications systems. Likewise, despite the debacle at ITV Digital and the setback it represents to government plans for digital TV, we should uphold the advent of that technology. In mobile telephony, the transmission of photographs is already a fact. And, though I don’t own Handspring’s merger of mobile phone, pocket organizer and colour Internet browser, the Treo 270, I’d like to find the £467+VAT it costs. It would work both in the USA and Europe.

Yet still stock-market scribes play down the convergence that has, falteringly, been achieved in IT. In the News Corporation empire, where they love to hate AOL Time Warner, they prefer to make belated fun of CNN’s Ted Turner (5). Alternatively, they delight in concluding that the company, having started the fashion for media mergers, may now ‘be forced to start a trend for breaking up’. (6)

It is fine, if you must, to uphold the Time Warner avant garde and rave about the deep popular culture of HBO’s Sex and the City. It is fine, too, to uphold Ernst Schumacher’s doctrine that Small is Beautiful. But it’s better to uphold convergence, and look forward in particular to the mobile internet.

As for mergers, there is one that has had a good press. HP’s Fiorina first got into trouble in 2000 by failing to buy the consulting arm of auditors PricewaterhouseCoopers (PwC) for $18billion. But on 30 July 2002, IBM’s new CEO, Sam Palmisano, pulled the trick off for $3.5billion.

Everybody agrees this is that rare thing, a good merger. Why? Not because it might lead to new technologies and progress, of a sort; for it won’t. No, the merger is greeted positively because it helps IBM make more money in the rather banal area of IT services ­ helping clients outsource the management of business processes (payroll, enterprise resource planning). And it is celebrated because, as contemporary etiquette demands, PwC has done the bidding of US regulators and separated off its consultants from its beancounters, so avoiding the appearance of impropriety.

The results of tomorrow’s mergers will be nothing to write home about. We may also be poised, if the corporate finance arm of Deloitte and Touche is right, for an era of demergers ­ one in which ‘the potential diseconomies of scale for both separating entities are far outweighed by clarity of purpose provided by the demerger’ (7). Among managers, clarity of purpose is indeed in short supply right now.

Altogether, the attack on mergers and on convergence today is not just a cynical and cyclical swing of fashion. It also assails the ideas of size and ingenuity, and, significantly, calls for full corporate compliance with a growing body of state regulation. It confirms that a new kind of anti-trust dynamics, peculiar to the twenty-first century, is alive and well and living in IT – a sector unconfident about reaching out into that century.

James Woudhuysen is professor of forecasting and innovation at De Montfort University, Leicester. He is coauthor of Why is Construction so Backward?, Wiley-Academy, 2004 (buy this book from Amazon (UK) or Amazon (USA))

(1) See PC Market Recovery Is Slow to Materialize, IDC Says, IDC press release, 18 July 2002

(2) Megatrends: 10 new directions transforming our lives, John Naisbitt, Warner Books, 1982

(3) ‘Convergence – six feet under’, Financial Times, 19 July 2002

(4) ‘Lazy, hazy, crazy thoughts’, Peter Martin, Financial Times, 30 July 2002

(5) ‘Cheeky deal that turned sour’, Raymond Snoddy, The Times Business News, 20 July 2002

(6) ‘That’s all folks: how AOL and Time Warner did the worst deal in history’, Dominic Rushe, Sunday Times Business News, 21 July 2002

(7) Deloitte & Touche corporate finance, press release on the report ‘Analysing The Value of Demergers Through Share Price Performance’, July 2002