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Strategy of a Megamerger: An Insider's Account of The Baxter Travenol-American Hospital Supply Combination.

Strategy of a Megamerger: An Insider's Account Of The Baxter Travenol-American Hospital Supply Combination, by Thomas G. Cody. Westport: Quorum Books, 1990. Pp. ix, 299. $45.00.

At $3,702.6 billion, the Baxter Travenol purchase of American Hospital Supply was the sixth largest merger and acquisition in the United States during 1985 and fifteenth largest among all U.S. merger and acquisition transactions in the six years from 1980 to 1985. The reason for this merger of two former competing health care suppliers was a strategic shift on the part of Baxter management to meet the drastically changing conditions which were occurring during this time in the highly regulated healthcare industry, primarily caused by the 1983 implementation of a new reimbursement policy by the federal government that was expected to shrink the size of the health care market.

The author, who at the time of the merger was Vice President for Human Resources at Baxter, tells the story of the acquisition chronologically, from the time American Hospital Supply announced a proposed $2.5 billion no cash, stock swap with Hospital Corporation of American on March 30, 1985 until approximately one year after the Baxter Travenol-American Hospital Supply merger went into effect on November 25, 1985.

His objectives in writing the book were to address two issues. The first is whether companies that merged for strategic reasons were actually strengthened by the mergers and whether the synergies which were the objectives of these mergers were realized. The second deals with the execution of megamergers, what the effect of the mergers were on the companies themselves.

The author is somewhat contradictory in his conclusions about whether the Baxter/American Hospital Supply merger actually achieved the synergies expected. He states that this strategic merger was successful within limits. Yet the analyzes the strategy driving the merger as sound but not complete and that other future steps would be required. He feels the Baxter strategy was too narrowly focused and counterproductive for those parts of the health care market where higher growth rate, bigger margins and greater technological innovations were occurring. He points to the fact that some key parts of American's medical sector, its technological "pump" were divested to pay down debt. While he defines a strategic merger by the distance on the horizon on which attention is fixed and the commitment to technology development, he does not take a stand about the effect of the merger on R&D, saying that there were both insiders and outsiders who felt that the company shortened its focus on technology. He also argues against looking at divestitures as merely a financial option to reduce debt but also as a strategic option. Yet he doesn't reconcile this with the divestiture of technologically oriented units.

In terms of effect on the organization, the author concludes that while there were some negative effects on employees and productivity, overall the company was strengthened by upgrading its skills base. However, he also concludes that there is no need for a satisfied work force without giving a great deal of evidence to support this rather startling conclusion.

The book, which is not complex and easily read, deals with an important issue which few books written about acquisitions address: the aftermath of an acquisition. While Barbarians At The Gate was riveting, one was left at the end with the question as to the long-term effect on RJ Nabisco, its employees and its customers. In Strategy Of A MegaMerger, Cody not only deals with the forces and personalities that led up to the merger, but deals with an equally important aspect of a merger, integration of the two companies.

The shortcoming of the book is that the author does not clearly lay out his conclusions about the issues he addressed and the evidence for them. There are inconsistencies. Can a strategy be both successful and incomplete? If it should not be evaluated on a financial basis, even after five years, what should be the criteria for evaluation? The author argues that it is difficult to assess the actual synergies obtained because it is difficult to determine how they should be calculated. While I agree that it is often difficult to evaluate the effect of mergers, this was one of the stated objectives of the book. Given the fact that he was an insider, he must have had some knowledge of the synergies that Baxter expected to obtain. Did they achieve them? One wishes for objective, precise criteria for evaluation and the author doesn't provide this. Hence, it is particularly hard to accept many of the conclusions that he makes about mergers and acquisitions in general.

Since the author does not provide criteria for making an evaluation of the Baxter strategy, one is left with financial performance. Moreover, an argument can be made that a strategy cannot be successful if it is not reflected in the financial performance of a company after five years. In 1990 Baxter reported a profit of $40 million and a earnings per share of --0.05 on sales of $8,100 million. Its performance did not match its competition in the medical products category. By contrast, competition outperformed the market in general on these measures. Mary Brownell, Pace University
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Author:Brownell, Mary
Publication:American Economist
Article Type:Book Review
Date:Sep 22, 1991
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