November 22, 2022

The Worst Merger Ever? Not Even Close

Last week, the NY Times published an epic account of the decline and fall of the corporate marriage between Time Warner and AT&T under the title “Was this $100 Billion Deal the Worst Merger Ever?” The article is full of juicy details about the clashes of personality & corporate culture that supposedly unmade the deal, but the punch line appears just a few paragraphs into the article:

Less than four years after the merger, AT&T abandoned its grand initiative. It spun off its Warner Media assets and ceded management control to Discovery. The new company, Warner Bros. Discovery, took on $43 billion of AT&T’s debt, and AT&T shareholders kept 71 percent of the company, a stake worth less than $20 billion. That amounts to a loss of about $47 billion for AT&T shareholders, based on AT&T’s $109 billion valuation of the deal at the time it was announced.

AT&T disputes those numbers and contends the deal was accretive. Whatever.  I think the point is that by any measure, this deal isn’t the worst in history.  In fact, it’s probably not even the worst deal that Time Warner was involved in.  Now, I don’t want to brag, but I was involved in a number of deals that turned into complete trainwrecks during my career, so I consider myself a bit of a connoisseur of crappy deals, and I have my own candidate for the worst deal in history.

The merger that I nominate for the worst of all time has a lot to recommend it. It resulted in the largest bankruptcy in American history prior to Enron, roiled the commercial paper markets, nearly put Goldman Sachs out of business & ultimately resulted in the government’s decision to nationalize an entire industry.  What deal am I talking about? The 1968 merger between The Pennsylvania Railroad and The New York Central. Don’t take my word for it, check out what Goldman Sachs has to say about the fallout from the deal:

The Penn Central Transportation Company was not only the largest railroad in the country; it was also the sixth largest firm in the United States and the owner of the most valuable real estate portfolio. Penn Central controlled more than 20,000 miles of track, one-eighth of the nation’s freight, and a network going from St. Louis and Chicago to Boston and Montreal. While its book value and assets were significant, problems lurked beneath the surface. Penn Central was asset-rich but cash-poor. And that was just the beginning.

Penn Central had been formed in February 1968 by the merger of two formidable rivals: the New York Central and the Pennsylvania Railroad. Together they controlled over US$6.5 billion in assets, yet combining forces did not yield an efficient or resilient entity. Freight cars were lost, switchyards were jammed and poor service and delays plagued both the passenger and freight lines. Penn Central had a highly complex corporate structure and experienced a number of management failures. As losses mounted, the dividend was cut and the stock price plunged; Penn Central had to rely on issuing commercial paper at ever-increasing interest rates. After an unsuccessful government attempt to rescue the firm, Penn Central filed for bankruptcy on June 21, 1970.

For Goldman Sachs, the bankruptcy posed enormous challenges on several fronts. In addition to the chaos descending on the firm’s client — Gus Levy’s client — Penn Central, the bankruptcy sent shock waves through the commercial paper market. As the market leader, the firm served nearly 300 other commercial paper-issuing clients who suddenly faced widespread redemptions from panicked investors. Market liquidity vanished and companies rushed to secure funding to buy back their paper.

Penn Central alone had US$87 million in issued paper in default. The potential losses for the firm were greater than its capital, posing a threat to its very existence. Goldman Sachs partners banded together to work through a series of litigation and settlements and the firm would ultimately see its way through.

Now that’s a bad deal! Although I think I make a compelling case, I’ve got to admit that I have a bias here. Both of my grandfathers worked for The Pennsylvania Railroad for decades (and my dad worked for them for a time too), so I remember this bankruptcy being viewed as a truly cataclysmic event by my family when I was growing up.

John Jenkins