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Recognizing the Full Picture

Question: In chronicling M&A over the past decade, what are your observations?

Andrew Ross Sorkin:  Most of these deals, for better or worse -- and probably worse -- don't work out.  You know, the academics will tell you it's 50 percent or 60 percent.  It's probably closer to 80 or 90 percent, and you can see it in the cycle.  When a deal gets done at the height of the market, when everybody is chasing each other and each other's tails, the deals are disasters.  And the only deals that actually tend to work are the ones that are done after the bloom has come off the rose.  When everybody is in absolute panic mode that the world is going to end, that is typically when the best deals take place.  So if you actually did a deal in the fall of 2008 or maybe the spring of 2009, I imagine those deals may in fact work out.  In fact, some of the deals that are happening now in the fall of 2009 may also work out.  But as things get better, to the extent that things stabilize and get better, I imagine those deals probably won't.  It's very, very difficult to make these things work out.  Bad deals -- how much time do you have?  I could start making lists.  A very bad deal was one where a company called Symantec merged with Veritas.  I remember that was not a great situation.  Hewlett-Packard bought Comcast -- not Comcast, but bought Compaq in 2001, maybe?  I can't remember that doing very well.  Credit Suisse bought a little firm called DLJ.  I don't think any banking mergers -- anyone would argue that the investment banking mergers worked out.  Some of the pharmaceutical deals were disasters.  The telecom stuff -- I mean, need I say more?

Question: Prior to the crisis regulators were more concerned with hedge funds than with banks.  What accounts for the fact that banks required bailouts, while hedge funds did not? (Arnold Kling, Econlog)

Andrew Ross Sorkin:  The question's a very smart question, because for many years all we did -- even as journalists, not just the regulators -- we said, ah, the hedge funds, they're going to blow up; or ah, the private equity firms, they're going to blow up.  And what nobody seemed to do was tie it back to where do they get their money from, which was the banks.  And so everyone said, regulate, regulate, regulate the hedge funds, and yet the banks, which frankly were regulated, but nobody was minding the store, clearly were the ones to blow up.  What I would not take away from this is that somehow we don't need to regulate the hedge funds, the private equity firms, the insurance companies or otherwise.  What I would take away from this is, usually when you're looking in one place, (a) that may not necessarily be the problem place, but that you've got to get deeper, and you've got to follow the money and really try to appreciate the full picture, because that was the biggest problem.  We compartmentalized everything; we said, ah, the problem's over here; ah, the problem's over here.  But we didn't look at it holistically.  And this crisis was a systemic one.  This crisis was a result of the fact that everybody was as interconnected as they were.

Question: Is there too much emphasis on going public in the United States?  Should more firms be privately held? (Arnold Kling, Econlog)

Andrew Ross Sorkin:  There's a good argument to be made that companies that are private, where they're run by partnerships, where everybody has true stake in them and they're not playing with other people's money, that by default it's a safer system, because you really have skin in the game.  You really own the company.  And this is not skin in the game like owning stock options or restricted stock.  This is your company.  And there's probably a good argument to be made for that.  Having said that, when you think about creating a large, scalable, global company, it's very difficult to do that in a private environment because you just don't have the capital.  And so the real reason, or the proper and right reason, go to public is to tap the capital markets, those public markets.  And that offers a benefit, but it also creates enormous risk.

Question: Do you favor abandoning the too-big-to-fail policy, or should we break up large financial institutions? (Scott Sumner, The Money Illusion)

Andrew Ross Sorkin:  I'm probably a believer in abandoning too-big-to-fail firms or breaking them up in some way so that the system can try to take care of itself.  I imagine you're not going to get there, and therefore I suspect regulation is what's going to be required.  But I have my own hesitation there, because throughout this book recording process I would spend time in Washington, and to the extent that you think the bankers on Wall Street don't know what they're doing, it's hard to have a lot of confidence in many of the lawmakers either.  And so you can say, okay, we need financial reform.  I can't promise you that's going to be executed properly either.

Recorded on December 3, 2009

Andrew Ross Sorkin believes in taking a holistic approach to avoid future meltdowns: "This crisis was a result of the fact that everybody was as interconnected as they were."

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