With the recent spike in Merger activity, perhaps its time to look more closely at the Mergers & Acquisition issues which affect investors. Consider these 5 issues when mulling over a potential Mergers or Acquisitions:
· Why? What are the strategic advantages to the combination?
· What Sector? Some areas have a good merger history (Oil, Banks), while others (Tech, Retail) are notably poor;
· “Paper or Plastic?” How is the acquisition being paid for? Cash, Debt or Paper?
· Valuation: What metrics are valuing the purchase? Are they reasonable?
· Management: Do they have the requisite skill set to successfully integrate two disparate entities?
These questions should help investors make an intelligent appraisal regarding potential acquirors or targets. Let’s do an a quick look at various reasons for mergers, and whether they tend to be successful or not:
Operating Business Purchases
Warren Buffett and Berkshire Hathaway buy businesses. Sometimes they complement the rest of their holdings (GEICO, American RE) sometimes they are just good solid franchises at a substantial discount. (Clayton Homes, Seitel, McCLane, Fruit of the Loom, Garan).
The GOOD: Apple bought NeXT, bringing not only the kernal of its newest Operating System, but getting innovative Steve Jobs to return as CEO in the process. Disney could pull off a “sequel” by buying Pixar, and getting Jobs as CEO.
The BAD: AT&T: Starting with NCR, and went straight downhill from there. A series of disastrous acquisitions to buy “earnings
The UGLY? Comcast/Disney: This deal raises numerous red flags: Disney is a pricey, under performing property with arguably the world’s most overpaid CEO; Comcast has no management experience in travel/media/film/TV business. Lastly, Comcast’s corporate governance is not good for shareholders. They are essentially a family run business (like Disney was) only they are public, with 2 classes of stock: CMCKA, CMCSK. The family has the voting stock, while the owners of the company are disenfranchised. It’s unclear whether that same silly arrangement would be in place if their bid for Disney succeeds.
Two other strategic serial acquirers to consider: GE and Cisco. They tend to buy – smaller, more readily digestible parts; They do a lot of these acquisitions — enough so that management actually becomes good at it.
Other players to consider: Barry Diller’s strategic purchases for Interactive Corp (IACI) have been solid, reasonably priced, and integrated well with the parent firm. IBM’s buy of Price Waterhouse Coopers Consulting seems to be working out so far also.
The HP Compaq acquisition: Faced with the potential marginalization at the hands of Dell, Carly Fiorina threw a “Hail Mary” pass via the HP Compaq merger. The only way they could stay competitive with Dell was to dramatically reduce costs, and to further expand into the enterprise and consulting businesses.
Widely despised before consumation, this has turned out to be a surprisingly successful pairing, based upon cost savings alone.
Trading Expensive Stock for Hard Assets
At the peak of the bubble, several companies traded their pricey paper (monopoly money) for hard assets:
Qwest / U.S. West
As widely disliked as the AOL deal was, Steve Case actually swapped monopoly paper for arguably the world’s largest collection of media properties. Who knows what AOL stock would look like today if not for that transaction.
Unlike the Yahoo deal, on the other hand, which traded dot com paper for dot com paper.
Today’s New York Times has an OpEd titled “The Medals Don’t Matter.” It’s by Jake Tapper, who is a well regarded ABC News Correspondent (formerly of Salon). The article reaches the conclusion that voters do not care about the military service of their Presidential candidates.
To reach this feat of logical deduction, Jake focused primarily on the 1992, 1996 and 2000 Presidential elections (and the 2000 GOP primary), and the Military Service of each candidate.
There are many, many analytical errors in his approach, sample size being the most obvious. But let’s focus instead on a very common logic error which seems to catch most people unaware:
Controlling for a single variable instead of many when analyzing complex systems.
I would be oversimplifying the situation were I to call this error, well, a mere oversimplification. But that’s what lay at the heart of this fallacy: Taking an extremely complex and dynamic issue — who won the Presidency and why — and then boiling it down to a single, and in this small sample, mostly minor issue. The author might as well have based it upon how many letters were in the men’s first and last names.
Presidential victories are the result of a far more nuanced and multi-faceted set of factors. This issue deserves to be examined in far greater depth . . .