Beware of Dog

Bite You in the AssThere was a very interesting article in the Wall Street Journal last week about the trend towards acquisition predators becoming targets, in a process referred to as “a bid for a bidder.” For shareholders of the “winning” bidder, it is the opinion of The Merger Verger that this kind of transaction has “BEWARE” written all over it.

Let’s look at what happens and why it makes the old Verger nervous.

As everyone knows, you do not want to examine the process of making sausage too closely, so with a contrarian view, let’s start there. Sausage maker Hilllshire Brands Co. recently agreed to buy processed food company Pinnacle Foods Inc. That prompted a poultry company, Pilgrim’s Pride Corp., to look at Hillshire … and bid for them. That then led meat producer Tyson Foods to bid for Hillside also. Tyson got Hillside but the Pinnacle deal (Remember Pinnacle? They were the original target here.) was called off.

So what’s wrong with all that?

Wurst or Worst?First, if Pilgrim’s Pride and Tyson were so interested in Hillshire, why hadn’t they bid before the Pinnacle deal was announced? Certainly Tyson – an experienced acquirer – knew beforehand basically what they were bidding for in Hillside but the whole process smells more of playing competitive defense than strategic offense. In situations like this, strategic rationale and thorough due diligence can go quickly out the window. And both of these deal attributes are cornerstones of a successful integration. You lose your focus on them or weaken their role in the deal process and your shareholders will pay. And pay.

Speaking of paying, is there any research on M&A that doesn’t point out how hubris and paying too much are key failure drivers over and over and over? And when is someone going to overpay most readily? When they think they are behind a competitive 8-ball or when the bidding is taken through several rounds. Sadly, there is no hero status for the guy who says, “Screw it; it’s gotten too pricey.”

There should be.

Which brings me to … The Verger’s Law:

The probability of deal failure increases by the square of the percentage change in price from the initial bid.

Is Amazon / Kiva another [Buyer] / [Seller]?

When it comes to corporate hubris and strategic inanity, there is no “beating a dead horse.”  The poor animal simply will not die.

So The Merger Verger offers herewith the prospect of history repeating itself yet again, this time in the large-cap tech sector.  I quote below a series of comments from a business blog discussing the acquisition by a tech giant of a very young company in a field only tangentially related to its core operations.  See if it smells to you the same way it smells to me.

Analysts’ quotes:

  • “With today’s purchase of [Seller], [Buyer] is making its boldest bid yet to remain the most potent force in e-commerce.”

Query: does the definition of the word “bold” inherently imply “smart?” Some analysts wondered:

  • “It’s a marked departure for [Buyer], which to date has acquired only companies directly related to e-commerce.”
  • “It’s also a heckuva lot of money for a nascent business, no matter what the growth and the promise—and one in an entirely new area in which [Buyer] has no experience.”

One tech analyst went so far as to ask:

  • “… why [Buyer] couldn’t have gotten the same benefits much more cheaply and wondered if [Buyer] management might be leaning on their sizable market cap a little too much.”

Eschewing such doubters, Buyer’s CEO offered this tidbit of strategic happyspeak:

  • “Together, we can pursue some very significant growth opportunities. We can create an unparalleled e-commerce engine.”

Each of those quotes – including the one from the CEO – could have been made (and several were made) about the Amazon/Kiva deal.  But they all come from a very different transaction, one that was made in 2005 and then unwound (after a huge write-down) in 2008.  The deal?

eBay’s purchase of Skype.

At the time of the unwind, one analyst remarked:

  • “eBay seems to have bought Skype and set it on auto-pilot (destination: nowhere) almost immediately.”

So all that Meg Whitman said about her acquisition, mirroring as it does what Jeff Bezos has said about Kiva Systems, could perhaps have been realized … if they had integrated the businesses more thoughtfully.  God is in the details (another quote, architect Louis Sullivan, this time.)

I seem to be in quote mode, so I will offer one more, this one from the 18th century philosopher, Georg Wilhelm Friedrich Hegel, who said:

“We learn from history that we do not learn from history.”

To which Karl Marx appended:

 “He forgot to add: the first time as tragedy, the second time as farce.”

The eBay acquisition of Skype was a tragedy, to use Marx’s term. It was one part strategic clunker and three parts integration disaster.  The Merger Verger will watch with interest to see if the Amazon acquisition of Kiva – repeating history – turns into a Marxian farce.

Previous postings on Amazon/Kiva:

Further reading on eBay/Skype:

Laugh or Cry: Morgan Stanley’s Smith Barney Mouthful

Don’t you just love the story from this week’s Wall Street Journal about the Morgan Stanley gagging on Smith Barney? (Click here to read; registration or subscription may be required.)

Really, how can you not love Wall Street?  What industry generates more money by giving others management advice yet simply cannot manage itself? Merrill? Poof! Lehman? Poof! Drexel? Poof! Solly? Poof! Bear? Poof!

So The Merger Verger was not surprised to learn that Morgan Stanley is choking on its acquisition of Smith Barney.  According to the Journal article, the process of integrating back office IT systems was more complicated than expected!  How pathetic is that?

Do you know what “more complicated than expected” is code for?

“We didn’t do our homework very well beforehand.” That’s what it’s code for. More Wall Street bravado.

Word to the Wise:

When Wall Street comes calling with a great acquisition idea, if you remember nothing about that industry and its history remember this: They have no clue about the role that simple “picking and shoveling” plays in making an acquisition work, not as deal advisors, not as deal doers.  Their advice is about ideas (and fees), not about the practicum of making those ideas work.  Listen, they are smart guys with frequently good advice; you just have to figure out for yourself if following it can be made to work and if so how.

Fun Facts from History:

The illustration on the right is the “tombstone” ad from Ford’s IPO in 1956.  (Click on it for a larger image.) Of the 25 “major bracket” firms listed in the ad, only two remain alive and independent today. (Ironically, Morgan Stanley does not even appear on the list, suggesting that someone there had pissed Ford off in a major way.)

Recommended Reading:

One of the truly great books on Wall Street dates from 1940: Fred Schwed’s, “Where are the Customers’ Yachts?” It will make you laugh and cry!