If they are too big to fail, make them smaller.”

-Nixon Treasury Secretary George Shultz about Fannie Mae and Freddie Mac

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The operative expression about many of the bailouts we have seen — AIG, JP Morgan (via Bear Stearns), Goldman Sachs, Fannie/Freddie and of course Citibank — is “Too Big To Fail.”

Perhaps the better expression is “Too Big to Succeed.”

The idea of a massive, one stop financial supermarket is now under fire. Of course, the idea of ANY massive conglomerate has for the most part, been discredited. Unsuccessful monsters are usually the result of huge M&A deals, disparate business lines, frictional corporate cultures. Think AOL-TIme Warner, Citi-Travelers, Tyco, etc. Oracle has been one notable exception to this, but that is because they have mostly bought firms started by former employees, keeping the family relationship.

The most successful growth by acquisition strategies tend to be where a bigger company absorbs mostly smaller firms. Cisco and GE are the masters of this slow, small acquisition to round out product lines and technologies. They don’t disrupt the corporate culture, the acquired targets are thrilled for the windfall, the integration tends to go much more smoothly.

Indeed, when it comes to conglomerates, we tend to see a two-part cycle. During the first part, acquisitions, mergers, big combinations are all the rage. Its a giant ego stroke for the CEOs, and it generates lots of fees for the iBankers. The second half of the equation comes when the awful handiwork of the M&A binge needs to be unassembled. That generates criticism of the CEOs, and lots of fees for the iBankers.

With the components of CitiGroup being taken apart and returned to their original boxes, this is merely another typical cycle playing out. Where it might take an interesting turn in the near future is the recognition that these firms are too unwieldy to run, too complicated to manage risk, too big to succeed. That gives impetus to discouraging these mergers, mega banks, and loss of competition. Are shareholders, the economy, and the taxpayers better off with just three mega-banking centers? Or, are we all better served with dozens of mid-size and large banks, versus only a few behemoths?

I am in the camp that finds most of these giant mergers do not work very well. Just about everyone — excepting the CEOs and iBankers — fare better with more banks of a size below ginormous.

Over the past 10 years, Shareholders have voted against the mega-banking centers. The question for the next 10 years will be how the politicos and regulators, especially the Fed and FDIC — vote on the matter.

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Sources:
Pandit Dismantles Weill Empire to Salvage Citigroup
Bradley Keoun and Lisa Kassenaar
Bloomberg, Jan. 14 2009

http://www.bloomberg.com/apps/news?pid=20601087&sid=aPe0BmS_BI_w&

Citigroup Ready to Shrink Itself by a Third
DAVID ENRICH
WSJ, JANUARY 14, 2009

http://online.wsj.com/article/SB123185686674677225.html

Citigroup Plans to Split Itself Up, Taking Apart the Financial Supermarket
ERIC DASH
NYT, January 13, 2009

http://www.nytimes.com/2009/01/14/business/14citi.html

Category: Bailouts, Corporate Management, Credit, M&A, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

20 Responses to “Too Big To Succeed . . .”

  1. nk says:

    How about the destructive dividend tax laws that contributes to the notion that “we”, the Ceo & Board can manage your free cash flow return more effectively than “you” the shareholder & rightful owner of that free cash low. This argument is cited over & over again by cash hoarding managements hoping for the magical “strategic alternative bullet” when things get bad.

  2. Boo-urns says:

    There might be enough evidence at this point to formulate a new antitrust basis. Since empirically we can see that financial supermarkets become too big to fail, and that “too big to fail” means they enjoy a de facto federal guarantee, in addition to stronger banking/securities regulation on larger entities, why not explicitly legislate that “too big to fail” is a basis for antitrust (or some parallel anti-merger/consolidation authority) review?

    This could effectively overturn the worst effects of Gramm-Leach-Bliley.

    Speaking of which, if you’re looking for something amusing, Phil Gramm will be arguing that Gramm-Leach-Bliley and the CFMA helped us avoid the credit crisis at AEI this Friday. That should be fun, if extremely extremely stupid (this is the man, after all, who claimed that the recession was all mental, caused because we were a nation of whiners).

    http://www.aei.org/events/type.upcoming,eventID.1862,filter.all/event_detail.asp

  3. The Epicurean Dealmaker says:

    Actually, Barry, assuming aggregate M&A volume stays the same (i.e., more, smaller mergers rather than fewer, larger ones) iBankers make out better under your preferred scenario. Deal fees scale inversely to the size of the deal, so an iBanker makes more money doing ten deals of $500 million each than one deal of $5 billion. Sure, there is more work to do on ten deals, but we’ll suffer that gladly. [BR: What about one deal for $50 B ?]

    I imagine it is similar for a money manager, who probably makes more money handling ten accounts of $10 million each than he would handling one of $100 million. And, unlike some money managers, iBankers never have discretionary authority over our clients’ M&A activity. Hmm.

  4. califreak says:

    Oracle’s M&A activity has been successful because they acquire smaller firms who are in the same business as Oracle (enterprise apps) and have very similar business models … they eat up their smaller competitors.

  5. Greg0658 says:

    from post “first part .. acquisitions / second half … needs to be unassembled”

    more like the begin’g – middle – end

    in the middle part – when the job cuts happen, plant shutdowns, debase’g family and community
    (reading a second time thru .. I almost became incensed with the Wall Street pov)

    ED says “money manager (s), who probably makes more money handling ten accounts”
    I added a plural because there should not be only 1

    when I write to to big to fail = to big to fight is from the standpoint above in the thesis but also from the point of view of a mom and pop grocery store startup vs. SuperWalMart*

    when we re-engineer stock price’g and who is win’g – it would be nice to have the middle part inject itself into the success big picture

    music not games in the 21st

  6. Wyatt_Earl says:

    Amen.

    Too big to fail is too big to make work.

  7. leftback says:

    Not too big to succeed in making Sandy Weill rich.
    Then he got out before the Ponzi collapsed…

  8. donna says:

    small mammals can survive rapid massive changes. Dinosaurs do not survive.

  9. Matthew says:

    How about “Too Big To Bail”?

  10. Dervin says:

    How would the regulation look?

    I can’t see anything passing constitutional requirements, that wouldn’t screw up Mergers for everybody. How can you allow a 50 or 5 billion merger while still banning the 500 Billion merger?

    Maybe tax policy which would make it too expensive to do a large merger. Limit the amount of money businesses could write off for iBanking services?

  11. Wyatt_Earl says:

    “It is unacceptable that large firms that the government is now compelled to support to preserve financial stability were among the greatest risk-takers during the boom period,” Bernanke said. “The existence of too-big-to-fail firms also violates the presumption of a level playing field among financial institutions.”

    http://www.federalreserve.gov/newsevents/speech/bernanke20090113a.htm

  12. willid3 says:

    i thought we got rid of all the investment bankers any way? and why let companies write off the IBANKERS fees for M&A any way? and i think we could add to Greg0658 comment.

    from post “first part .. acquisitions / second half … needs to be unassembled”

    there is the first part the acquisition the beginning which includes job cuts, plants and facilities closures

    the middle part, which includes among other activities job cuts, plant and facilities closures, and blame game (mostly blaming any body not responsible for the problems)

    followed the end game…..which includes jobs cuts, plants and facilities closures, loss write offs, potential bankruptcy filings, etc

    seems to me that the main purpose of these exercises is to stroke the CEO and fees,,,,and reduce employment and wages.

    seems to only do part 2 of that.

    and of course, repeat, repeat and repeat adinfinitum

  13. jminsf says:

    I feel this point “I am in the camp that finds most of these giant mergers do not work very well.” bears amplification – it isn’t that they do not work very well, it is that most of them flat-out fail:

    “After all, many mergers ultimately don’t add value to companies, and even end up causing serious damage. “Studies indicate that several companies fail to show positive results when it comes to mergers,” says Wharton accounting professor Robert Holthausen, who teaches courses on M&A strategy. Noting that there have been “hundreds of studies” conducted on the long-term results of mergers, Holthausen says that researchers estimate the range for failure is between 50% and 80%.”

    From 2005 – Wharton Business School: http://knowledge.wharton.upenn.edu/articlepdf/1137.pdf?CFID=2621179&CFTOKEN=41130433&jsessionid=a830c729da47cdb515212228867160632425

  14. Shnaps says:

    Exactamundo! Excellent post, Barry.

  15. Rene Korda says:

    Unfortunately, modern state tends to promote oligopoly, rather than oppose it. Though I hope evolution will straight it out.

  16. constantnormal says:

    Sadly, the notion of “optimally sized” was long ago displaced by the “bigger is better” meme.

    We live in a culture dedicated to super-sizing, bigger portions, bigger waistlines, bigger businesses, bigger school systems, bigger businesses, bigger government.

    However desirable optimal might be, it ain’t gonna happen. The only way our ginormous institutions are gonna shrink is for more efficient competitors to devour them, a bite at a time.

    Of course, with our loyal best-gummint-money-can-buy backing the money-changers, such a down-sizing would necessarily imply the minimalization of these United States.

  17. flipspiceland says:

    The “Too Big to Succeed” theory applies equally well to the United States of America. The US has become a tumor, now too large and must be removed.

    The country has proven too big to succeed. There are no brains (or assemblage of brains) large enough to comprehend the complexity of trying to run, or manage a country of this size and diversity. They cannot divine the Law of Unintended Consequences.

    The Democratic republic has failed and is now on life support, has been for a decade or more.

    The government has created 10 problems for every one it tries to solve. Why? Because the people behind the solutions are greatly flawed men and women, and that’s even before corruption sets in which is nearly immediately upon taking office.

    Like nearly all large entities that fail a new model is needed, desperately.

    Downsizing the United States is the only possible way to manage the leviathan, the giant that this lumbering country has become. Or we will just plod along and eventually die a slow death while the Asian tigers eat us for lunch.

    Growing our government which now seems to have happened over the last 8 years, taking up over half of our GDP, and more cancerous growth predicted, will only hasten that fatal day.

  18. WilliamBanzai7 says:

    In the world of PONZINOMICs, the bigger the better.

  19. PMcKim says:

    Barry,
    I believe you are right, except that consolidation acquisitions are successful when they completely take out competition. Oracle’s biggest acquisitions in their big markets they didn’t dominate — BEA and PeopleSoft were NOT founded by Oracle alums. nor did they have Oracle cultures. Only Seibel had an Oracle culture run by an ex-Oracle guy — although all successful software companies had very aggressive management as that was a key to success, more so that technological proficiency.

    The key to Oracle’s success was in taking out the competition — pure and simple. The issue then becomes one of merging /porting the code streams over time. In the case of Oracle there is no other competition except for SAP in Apps and IBM in databases and plumbing. Thus there is no other game in town no matter how bad Oracle does.

    Oracle has always been dictatorial. But so is SAP and IBM so there is little choice. But their stuff still works. The banks became dictatorial but their BS just didn’t work anymore. It’s probably the only case of a big industry putting itself out of business.

  20. Moss says:

    A lot of these deals were really deception…. to cover up the fact that the core firm had little or no organic growth. The accounting rules allowed for much trickery with goodwill and other such nonsense. Weill was a master at that. He was able to paper over that inherent flaw and spun it as strategic with all the associated symbiotic benefits that would accrue. Of course this justified a higher PE since he was a genius.

    I thought Dave Duncan who founded PeopleSoft was an ex-oracle guy.