All together now?

There are, of course, situations in which acquisitions do make sense. According to a recent meta-analysis of a number of merger studies, mergers that rely more on cost-cutting — combining back-office operations, eliminating redundancies, and so on — than on promises of vast growth are more likely to be successful. (The merger of J.P. Morgan and Bank One, for instance, led to more than three billion dollars in annual cost savings.) Acquisitions of smaller, younger private companies are usually wiser than acquisitions of publicly traded firms. They’re more likely to give you access to new technologies or products, and you’re more likely to be able to make the deal at a good price.

In 2000, for instance, Microsoft paid less than $40 million to buy the video-game developer Bungie, the creator of Halo. In the six years that Microsoft owned the company, Bungie’s products generated well over $1 billion in revenue for Microsoft. When you buy a publicly traded company, by contrast, you typically have to pay a steep takeover premium. And that matters, because, arguably, the best hope of making an acquisition work is doing the deal at a bargain price.

Unfortunately, the CBS-CNET merger fits none of the criteria for a good deal. The overlap between the two companies is limited, and so are the opportunities for cost-cutting. And, because CNET is neither small nor privately owned, CBS paid a 45 percent premium on CNET’s stock-market price. That means that, for the deal to work, it will need to improve CNET’s performance not by a little but by a lot.

Rationally speaking, then, it’s unlikely that this deal will end up making CBS money. But the deal was not driven solely by that consideration. CBS is also trying to fight the perception that its business is slowly fading away. This isn’t unusual. CEOs of public companies often feel what you might call the “grow or die” imperative — if the company isn’t growing briskly, they worry, investors will abandon it in search of better opportunities.

This fear often has a basis in reality — Wall Street analysts, for instance, have been pressing CBS to do something to revitalize the company — and CEOs should worry about increasing shareholder value. But while acquisitions, almost by definition, boost a company’s growth rate, they too often make it bigger without making it better.

It’s the rare CEO, of course, who’s comfortable presiding over a shrinking empire, and running a public company creates a bias toward action, if only as a way of convincing investors that you recognize your problems and are dealing with them. But history suggests that, when it comes to mergers, the best response is often to just say no. In effect, deals like the CNET acquisition are a bit like an aging outfielder taking steroids in order to stave off the boobirds. The difference is that steroids usually work.

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