Mergers Send a Message
They don’t usually ring a bell at the top of the market, but every once in a while somebody up and buys Time Warner.
If there was ringing in your ears when you heard the news, you’re not alone.
And neither are Time Warner or AT&T. Plenty of deals were announced on Monday last week, and S&P Global Market Intelligence says October 2016 is already the third-strongest month ever for US M&A.
I plan to announce a slew of hostile takeovers on Halloween, so obviously that’s understated.
You might laugh now at my plan to merge GoPro, Six Flags, and American Airlines, and that’s fine. You can apologize in 18 months when I’ve built the world’s first transportainment empire. Our first step will be replacing both up and down escalators with waterslides. Aerial drones will capture all the fun and share it with the world on social media. Argue that we’re not making the world a better place at your peril: This is a whole new kind of mobile + local + social.
Why So Serious?
Given the way that CFA Institute Financial NewsBrief readers reacted when we asked them about the heat in the merger market, you’d think news of my plan had already leaked out.
We asked readers to complete a sentence:
October 2016 is the third-strongest month ever for M&A announcements, according to S&P Global Market Intelligence. And that’s _______.
Almost three out of four respondents (74%) chose “Scary,” “Bad,” or “Troubling,” with the majority (52%) falling in the latter camp. That 52% said the high degree of merger activity suggests companies can no longer generate sufficient organic growth. That’s real: The reasoning goes that doing a deal is expensive surgery to gain a new appendage. To many, it’s not something you do when your existing arms and legs work fine.
But it’s also a way to build fortunes. Money managers often dislike investment banking transactions out of habit, or perhaps because skepticism sounds smart and feels good. Now is a good time to reflect on the track record of Henry Singleton, who sowed and reaped an impressive fortune through smart buying.
There is a “trust me” element to deal making that can create substantial misfires though. One great example comes in the form of a book I have sitting on my desk: Merger Mania by Ivan Boesky.
A contemporary review from the former editor of Mergers & Acquisitions offers the following choice quotes:
“Boesky hopes to end the ‘tall tales’ about his profession by showing its calculated methods while warning that no single book can teach them.”
“And although the probabilities of completion versus sellout are calculations intrinsic to the arbitrageurs decision to invest, Boesky never discusses how to come up with such numbers.”
“This silent slap, more than the economic indignities of tender offers denounced in the book’s conclusions, shows the worst side of hostile takeovers: CEO’s inhumanity to CEO.” (This refers to a phone call that was not returned.)
The last one is a reminder of the special form of myopic ego that can be present alongside, in addition to, or in place of a compelling reason to affect a merger. After receipt of a bid, a management team finds itself using a rarefied, intermediated, and hopefully sexless version of Tinder. There is a straightforward obligation to shop the company around, and selling yourself can be less than dignified. The horror.
The actual worst side of large deals is difficult to fully describe. For starters, there’s a lot of money sloshing around to attract unethical actors like Boesky. Almost immediately after publishing Merger Mania, he paid a $100-million fine for insider trading and eventually received a three-year jail sentence. The SEC’s historical society does a nice write-up.
Barring the cloak-and-dagger stuff, big deals are still scary. Heath Ledger, as the Joker. lays out why as well as any professional ever could in The Dark Knight: “It’s not about money. It’s about sending a message.”
What if management’s motivation has more to do with building the biggest something than executing a strategy? Think about buying clothes for a minute: Activity can be easily and expensively confused for progress. Our desire to make sense of things can lead us to build a sophisticated narrative for manic, short-term decisions. Later in the film, the Joker compares himself to a dog chasing cars: “I wouldn’t know what to do with one if I caught it!”
General vs. Specific
If you’ve read this far, you might well think I could never be among the 14% of respondents who think these announcements are sensible and great news, or the 12% who feel they are just what the market needs to move further up the wall of worry.
But all I have done is show you the straw man in M&A that everyone hates and nobody wants to be.
Investment bankers know about these stories too, and have more of them. The thing is: I can make whatever general case I want about M&A and the risks involved, but specifics win this sort of argument every time.
What message are you getting from these mergers? Share your thoughts in the comments below, please! I find myself remembering that there are returns to the size of your platform in media and content that are outstanding, yet hard to understand from the outside. It would be nice to see the pessimist’s arrogance defeated in this case, and indeed I am left wondering how many of the folks who are scared by these deals consider themselves contrarian.
I look forward to any thoughts you may have.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
I’m getting several messages, to wit:
#1. Because the data show that over 80% of closed deals fail to earn back their cost of capital, these October 2016 deals, like others before them, are likely to be overpriced failures, too.
#2. The shareholders on the buy-side own a company whose moronic and overpaid hired hands in senior management would rather give away money to strangers (selling shareholders) than pay dividends to their long-suffering enlistee-investors who succumbed to their siren song to join the Trust-Me Army.
#3. The executives on the buy side and those on both sides of so-called ‘mergers of equals’ are dumber than dirt. If their IQs were one higher, they’d be vegetables. And if they were one lower, they’d be in Congress.
#4. The only winners in such transactions are (a) shareholders on the sell side (so long as the deal is for cash or, if it’s not, so long as they immediately sell their new shares), and (b) the i-banking prostitutes responsible for getting the deal overpriced in the first place. Like other streetwalkers, the latter get paid only if there’s a transaction. That creates an insane buy-side incentive: close the deal, no matter how bad it is for the client. And the data attest to the power of that incentive.
#5. I continue to be amazed that ANY corporate buyer would retain an i-banker. Such buyers might as well scarf down a half-dozen large doses of Ex-Lax because one thing is certain: they’re gonna be cleaned out in ways they’ve never dreamed of. But, at least with Ex-Lax, their expectations will be realistic at the outset.
Warren —
Please be careful in future not to forget the professional nature of this forum. I understand that you are quite passionate about this subject and that there is no shortage of bad behavior in M&A on both the client and adviser side.
Name calling is never appropriate on the Enterprising Investor though. Please refrain from using pejorative language of any kind in future comments. Thank you in advance for your help keeping this a civil home for informed discussion.
I look forward to your future contributions. Cheers, and all the best —
Will
Um, you know Boesky’s idea of research, right?
Nick —
That’s the joke 🙂
Cheers and all the best.
Will