Connie Bruck

Connie Bruck writes:

In their 1985 annual report, the President's Council of Economic Advisers had weighed in with its conclusions, surprising only in their ambitiousness. They purported to settle once and for all the decades-long debate over whether takeovers are beneficial or harmful. This august council concluded that mergers and acquisitions "improve efficiency, transfer scarce resources to higher value users, and stimulate effective corporate management." The conclusion was remarkably definitive but, apparently, more polemical than proven. In some of the more interesting testimony that emerged from the congressional hearings on takeovers, F.M. Scherer, a Swarthmore College economics professor, had rebutted the Council's findings. In his testimony in March 1985 he pointed out that the report's conclusion that takeovers improve efficiency relied on stock market event studies, which are short-run in orientation (examining stock prices during periods ten to thirty days before and after the announcement or consummation of the merger). If one looks at a period of ten years or so, Professor Scherer testified, the results are very different.

Scherer has developed the premier data base in this country for looking at the financial consequences of merger. This data base draws upon twenty-seven years of merger history and seven years of sell-off history for nearly four thousand individual businesses.

These are some of Scherer's findings, from his case studies and statistical research:

- Contrary to the Council's view that merger-makers sought companies where management had failed, most in fact _targeted well-managed entities. What they were generally attracted by was not sick companies or slipshod management but undervalued assets.

- Takeovers by firms with no managerial expertise in the acquired company's line of business tended to impair, not improve, efficiency.

- Takeovers frequently led to short-run profit-maximizing strategies, such as the "cash cow" strategy under which "a business is starved of R & D, equipment modernization, and advertising funds, and/or prices are set at high levels inviting competitor inroads, leading in the end a depleted, non-competitive shell."

- On average, acquisitions were less profitable for the acquiring firms than the maintenance of existing businesses and the internal development of new business lines.

- Many of the takeovers led to selloffs, which did improve the efficiency of the simpler, self-standing entity.

- While Scherer had relatively few hostile takeovers in his sampling, in those he did study he found that the takeover aggravated performance deficiencies that existed earlier.

In response to questions from panel members, Scherer also made and interesting point about the high-leverage, or debt-intensive, capital structures of many U.S. companies, which are coming to resemble Japanese companies' financial structures. Indeed, in the gospel according to Milken which is spread by so many of his acolytes, it is often noted that Japanese companies have for years carried much higher debt-to-equity ratios than American companies. True enough, Scherer commented, but the Japanese are able to carry such high levels of debt because when they get into financial difficulties the government bails them out.… (more)

Connie Bruck writes [about Steve Ross]:

Because he was a scholarship student, Ross was given the job of taking the younger children to Central Park each day; and the school's coach, noting his way with the children, asked him to be a counselor-in-training at a summer camp in Maine, Camp Kohut. Ross was given a bunk of five-year-olds. For Ross's young charges, he made all of life a game: they didn't walk to the mess hall, they go there by playing. In order to come out of their bunk, they had to guess in which hand Ross was holding a coin (he was already practices at sleight-of-hand); whoever guessed right was allowed to descend one step, and whoever got to the bottom of the steps first won.

One of Ross's campers, a difficult little boy who cried a great deal, was named Henry Jaglom. His parents seemed always to be traveling and missed the visiting days. That summer and the next (Ross again was Henry's counselor), when visiting days arrived, Henry would always guess the right hand and make it first to the bottom - and then, when his bunkmates were with their parents, he would set out for extended nature walks with Ross.

About thirty years later, introduced to Ross in a restaurant, Jaglom thought they were meeting for the first time. But Ross, upon hearing Jaglom's name, declared with a broad grim, "You were the one who gave me this grey hair." - and then recounted to Jaglom how his lucky streak had been arranged. Jaglom later said that he "felt something welling up in me as he told me what he had done. It was so extraordinarily kind. I remembered the feeling of soaring down those steps. I'm sure that that was the first taste of winning I ever had."

And:

Ross defies facile, conclusive analysis. For example, to say that he was incessantly manipulating to project a certain image is not to suggest that his generosity was all a sham. The limitless giving that became his hallmark in later years had started early, and in instances where it certainly had no public purpose. His daughter Toni recalled that when she was a little girl, Ross seemed "obsessed" with Christmas. "There were so many gifts, and you'd be opening and opening and opening presents, and you had to get them all opened before breakfast. And there were rules; certain ones had to be opened first, and then there were others, behind the tree, and you had to get to those last - it was exhausting!"

As she got older, Ross gave her "thousands and thousand and thousands of gifts." Finally, she had said, "No more." "He was a giving tree," she continued, "People needed things from him: that was his mind-set. He was stuck in that. That was the tragedy."

However murky the sources of some of Ross's behavior, this much is clear: he recreated himself in mythic proportions that were, by and large, untrue. The myth portrayed him as a man who was infinitely generous, loyal to the death, and who valued the well-being of his friends above his own - sacrificing himself for the good of others. But the truth was that his extraordinary generosity was funded to a great degree by the company; his loyalty, in many cases, endured as long as people were useful to him; and - driven by a compulsion to win - he tended to put his own interest ahead of others, in situations large and small.

Not only did Ross not sacrifice himself for the good of others, as did his putative soul mate, George Bailey, but the precise converse was true - even when it came to his best friend. He had, after all, sacrificed Jay Emmett to save himself.… (more)