Jewish World Review Nov. 26, 2002 / 21 Kislev, 5763
Urge to merge is hard to resist
http://www.jewishworldreview.com | After months of lectures from politicians on how to run their businesses, corporate executives must be chuckling to themselves. They're watching Washington policymakers make what will likely be a major organizational misstep of their own - pushing forward a massive, ill-conceived merger that puts many of the failed mega-deals of the '90s to shame.
The largest reorganization of the federal government in a half-century is now under way.
Last week, the Senate followed the House in approving the Homeland Security Bill. The legislation will combine 22 existing agencies and 170,000 federal employees to create a new government department with at least a $35 billion annual budget request. The new supersized security bureau could take years to fully put in place. And there's no assurance that we will be any safer than when we started.
Stephen Moore of the Cato Institute says Republicans and conservatives are falling into the same traps that liberals have fallen into over the last 50 years: "If there is a problem in America, create a new government program or government agency to deal with it," says Moore. "And we've seen over the last 30 years that when we created the Department of Energy, that certainly didn't solve the energy crisis. We created the Education Department. That didn't solve the education problem."
Indeed, you could argue that these departments compounded, rather than solved, problems. Washington apparently hasn't learned from the mistakes of corporations.
Agencies such as the Immigration and Naturalization Service have deep-rooted structural problems. As if we needed further evidence, a new report shows that the INS is doing a lousy job at our borders, the border patrol is undermanned, and our frontiers leak like a sieve. Instead of focusing on fixing these existing system failures, the government is trying the bigger-is-better approach.
Granted, the urge to merge can be hard to resist. A successful merger promises increased market share, supposed economies of scale and, of course, my personal favorite - synergy.
Sounds terrific, but far too often the risks of merging far outweigh the potential benefits. Companies fail to clearly define goals. Corporate cultures clash. New layers of bureaucracy choke off innovation.
For the investing and taxpaying public, this may sound depressingly familiar. Merger mania played a big part in the excesses of the late '90s.
Take, for example, Vivendi's troubled merger with Houghton-Mifflin. Just 18 months after the deal went through, Vivendi sold off the publisher for less than it originally paid. Analysts blamed the fiasco on a bad fit. Add it to the list of doomed deals - Conseco, Tyco, MCI WorldCom and a legion of other misbegotten mergers.
In fact, as Wall Street and big business know, mergers most often don't work. A much-publicized study by KPMG in 1999 found that 83 percent of mergers were unsuccessful in producing any business benefit, and even share prices didn't rise for the long-term. A study done by Kaplan and Weisbach in the early '90s showed that 44 percent of acquisitions failed and were divested after an average of seven years.
That suggests the Department of Homeland Security has about a 50-50 chance of working. Those aren't good odds for something as important as national security, whether at home or abroad
But don't lose hope. When the economy and the stock market sputtered and investors got angry, Wall Street finally went back to the basics - focusing on fixing business fundamentals.
If, as I expect, the new Homeland Security Department fails organizationally, and the public eventually demands answers, politicians may finally focus on the core problems in our security system - and that's what we should be doing now.
But reorganization is always easier than improving performance, whether in business or government.
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11/19/02: Are we really so bad off?