Watch Out, Investors, Tarzan's Back!
By Geoffrey Colvin

(FORTUNE Magazine) – Nobody wants to jinx it by saying too much. And--who knows?--maybe it's just a mirage, really nothing at all. But down on Wall Street and in CEO suites across the land there's a hard new glint in certain eyes, a swelling of certain chests, hormones coursing through certain bodies at the mere possibility that ... just maybe ... takeovers are coming back.

The excitement isn't really about money. It never is, though of course that arrives in bargeloads for winning investment bankers and CEOs. This is way more primal. It's about standing tall, throwing your head back, pounding your chest, and yelling the Tarzan yell: "Aaaaaaayaaayaaa-yaaaaaaaaaaa!" It's about taking over.

We're still nowhere near the storied days of the late '90s, when gargantuan 11- and 12-figure deals set records that won't be broken for years, maybe decades. But after a long deal coma, we're seeing twitches of activity. Palm is buying Handspring. Idec is buying Biogen. WPP is buying Cordiant. Oracle wants to buy PeopleSoft, which wants to buy J.D. Edwards.

None of those are giant deals, but they add up to more than we've seen in quite a while. And that, I'm sorry to report, is worrying news for America's investors. When CEOs and I-bankers get caught up in the rush of dealmaking, the shareholders of those yelling the Tarzan yell--that is, of the acquiring company--usually end up suffering.

To see why, consider the guy pounding his chest most furiously at the moment, Oracle chief Larry Ellison. He wants to own PeopleSoft. At least he says he does. Maybe he just wants to mess up PeopleSoft's deal with J.D. Edwards or put Siebel into play--maybe all those things. One way or another, he wants to dominate and decimate a rival. "Aaaaaaayaaayaaayaaaaaaaaaaa!"

In a way, that is surprising. Ellison has long relished his reputation as the wild man of the software industry, but whatever you think of him, he has been one of the world's great wealth creators. He took a piddling amount of capital and built Oracle into a company worth $65 billion, even after the tech meltdown. He still owns 25% of the company. So he's the last guy you'd expect to make a wealth-destroying move. But his recent actions are a perfect example of how lust to close the deal (whether hostile or friendly) leads managers to hurt their shareholders.

Right now PeopleSoft is performing okay but not great. Times are tough in the enterprise software business, and the company has not been earning its cost of capital. But investors like its prospects and have given it a decent valuation. They think the company may soon earn a respectable return on its total capital of $1.7 billion.

Ellison wants to buy the company for $6.3 billion. If the bid succeeds, total capital invested in PeopleSoft will suddenly leap to $8 billion ($1.7 billion plus $6.3 billion). The day after such an acquisition, PeopleSoft would be the same business it was on the day before. But now, instead of having to earn profits that will exceed the cost of capital on $1.7 billion (which it hasn't been doing), it must beat the cost of capital on $8 billion if it's to create wealth for its new owners, Oracle's hapless shareholders.

Oracle's justification for such a clearly nutty deal is classic: The combination would be "immediately accretive to earnings per share." Duh. The proposed purchase is all cash, so if it brings in a single dollar of earnings it will increase earnings per share. Investors couldn't care less. They demand a deal that brings in after-tax cash profits greater than the cost of the capital invested (in Oracle's case a hefty 13.3%). Apparently they don't expect it, having bid the stock down since Ellison's announcement.

Of course maybe you think Ellison has no intention of closing the deal. Could be, though he swears he does, and he has raised his offer. But if the deal goes through, it will illustrate exactly why study after study has shown that most acquisitions destroy wealth for the acquiring company's shareholders.

Yes, deals are exciting for those involved. That's the trouble. They're often more exciting than operating a business. But painful experience shows that when dealmakers are aroused, as they may be now, it's probably bad news.

Advice to CEOs and I-bankers: Knock off the Tarzan yell. Investors absolutely hate it.

GEOFFREY COLVIN, the senior editor at large of FORTUNE, can be reached at gcolvin@fortunemail.com. Watch him on Wall $treet Week With FORTUNE, Friday evenings on PBS.