Honeymoon Often Ends Quickly After Big Companies Get Hitched

The nation’s largest railroad is forced to give away business to unclog its lines after merging with a big rival.

A huge bank puts money in the wrong customers’ accounts because of post-merger mix-ups.

A top health insurance company loses track of rising costs because it cut too many jobs after a merger.

Now an upstart telecommunications company, WorldCom, is trying to buy its much-larger rival, MCI, in the richest-ever U.S. takeover. History is not on its side. As corporate giants buy their peers in record numbers, many are finding that pricey buyouts have brought new, often expensive, headaches.

“At some point the size of the organization becomes so complex, so complicated, that it is increasingly difficult to manage and orchestrate,” said James Brock, a professor of economics at Miami University in Oxford, Ohio.

“We end up paying CEOs huge amounts of money to hold together something that by its own inertia and weight should fall apart,” Brock said.

WorldCom is taking its biggest leap yet in trying to buy No. 2 long-distance company MCI. WorldCom has expanded rapidly in the last two years under Chief Executive Bernard Ebbers, spending more than $15 billion in takeovers.

But its stunning $30 billion offer for MCI has WorldCom attempting to take over a company more than twice its size.

“This is an order of magnitude larger than anything Bernie’s tried before. … This might be the first time he gets a little indigestion,” said Scott Wright, a telecommunications analyst with Argus Research.

Wright said he believes MCI’s residential long-distance business might not fit into the combined companies’ operations. WorldCom has built its business catering to high-paying corporate customers.

And while WorldCom touted its U.S. presence over its British rival, being from the same country doesn’t mean WorldCom and MCI will get along.

“There are potential frictions putting together two entrepreneurial cultures as well,” Wright said. “There are questions about long-term vision. There will be personality issues.”

Since the beginning of October, three industry leaders revealed their growing pains after expensive purchases.

Union Pacific, the country’s biggest railroad, plans to give business to competitors because problems following its $5.4 billion marriage with Southern Pacific last year left railcars stuck far from the freight that needs to move.

Aetna said its profits will disappoint Wall Street because of higher medical costs. Analysts have said the company cut too many claims processors after its $8.9 billion purchase last year of U.S. Healthcare, leaving Aetna unaware that its costs were rising and slow to raise premiums.

Add those to one of the more embarrassing examples: Wells Fargo earlier this year paid back depositors’ money it put into the wrong accounts. The mix-up was caused by computer problems from Wells’ $14.2 billion combination with fellow California bank First Interstate.

“You don’t really know the limits until you start testing them,” said Hollis Rafkin-Sax, a managing director at consulting firm Gavin Anderson & Co.

Other companies that shared WorldCom’s bold vision have faltered before. In the late 1980s, United Airlines was forced to pare its focus back to airlines after an ill-fated attempt to become a travel supermarket by buying the Hilton and Westin hotel chains and Hertz Rent-A-Car.

In fact, every period of merger boom since the 1890s has produced only a minority of companies that actually improved their operations after massive takeovers, said Miami University’s Brock. The breakups of the ITT and Gulf & Western conglomerates are evidence, he said.

“Each generation has to re-learn the lessons of the past generation,” Brock said. “If humanity’s knowledge proceeded the same way the mergers and acquisition (business) does, we’d still be eating raw meat in caves.”