Still Untied: Revisiting United+Contintental

The news from United Continental Holdings Inc. (UAL) is not good. Amid the bad weather that hampered all US airlines and competitive issues affecting all US-Asia carriers, one unique difficulty emerges:

“parallel processes” left over from the 2010 merger.

Merger Verger Translation:

We still haven’t been able to realize the intended benefits of the merger, here, nearly four years later.United-Logo new (untied)

Are you getting that? It is hard to make mergers succeed. And United worked tirelessly at it, hired smart advisors and focused legions of people exclusively on the integration. It still didn’t pan out as planned.

GOD IS IN THE DETAILS, folks. Continue reading

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!

Amazon + Kiva: I Think I Finally Get It

I’ve worn a groove in my head from scratching it on last week’s Amazon-Kiva Systems deal.  After reading all the press stating what a crafty move it is and after the huge uptick in Amazon’s (NASDAQ: AMZN) stock price, The Merger Verger feels like the odd man out on this one. [Original posting here]

I still disagree with all the fawning Wall Street analysts and tech-media commentators but I think I have homed in on an explanation.  Let me offer up some facts and then some observations.

Facts:

  1. Jeff Bezos built a spaceship to go to Zebulon or  some place.  (You can look it up.)  The guy clearly has a “boys with toys” problem.  Robots – even ones that look like giant orange throat lozenges skating around a warehouse floor – count as objects of desire. (Earth to Jeff.)
  2. Kiva (founded in 2003) creates leading-edge material handling systems used by an impressive list of customers, including units of Amazon (but not Amazon itself).  It’s privately held but recent revenues were reportedly north of $100 million, making the purchase price of $775 million a bracing 7X multiple of sales. (Yikes.)
  3. Amazon has a long history of successful acquisitions, but all of them of the horizontal type. They have vertical partnerships but their experience in integrating a company whose business fundamentals are entirely different to theirs is basically nil. (Uh-oh.)
  4. The company’s press release about the Kiva acquisition says a big nothing about the rationale behind it and offers only one minor tidbit about the plans for its integration: Kiva’s HQ will remain in Massachusetts.  (Whoopee.)
  5. Equity analysts have settled on the rationale that Kiva robots will bring significant efficiencies to Amazon’s order fulfillment process, which they should.  (At an NPV of minus how much?)
  6. Other analysts have pointed out that the move could be a competitive one, designed to prevent others from having the cost/efficiency advantage associated with the Kiva system, thus enabling Amazon to defend an important advantage. (Come on guys.)
  7. One or two analysts have floated the idea that all those reasons apply but are small beer; the real reason is that Kiva unlocks a door to the next transformational step for Amazon. (Now, ladies and gentlemen, we may be getting somewhere.)

Here’s The Merger Verger’s take on all that:

  1. The absence of any Amazon commentary on the deal’s strategic rationale could be a case of intentional competitive silence but it sure smells like the lack of any meaningful strategy to describe.
  2. On the efficiency explanation, to suggest that the best way to capture the benefit of a key component of your operational infrastructure is to own it outright is just hubris.  By that line of thinking, Amazon should buy a corrugated box manufacturer, UPS should buy a truck maker and Apple should buy, well, China. Metaphorically speaking, there must be some compelling reason to own when you can rent.
  3. As a corollary, one does not pay 7X sales to obtain operational efficiencies; that’s just stupid.  One pays that kind of multiple to launch a sales rocket.
  4. Similarly, to buy a technology company merely to prevent competitors from gaining access to it is a flaccid strategy at best.  Even acknowledging Kiva’s technological superiority, squirreling it away for Amazon’s exclusive internal use merely invites robotics wannabes to fill that void.
  5. Again, one does not pay 7X sales for a company that one intends to prevent others from patronizing. For Amazon to gain an economic return, Kiva must be able to sell its products widely.
  6. So what one DOES pay 7X sales for? One only pays that kind of money to unlock a transformed future.

Amazon is already a world-leading provider of retail fulfillment services, both internally and as a third-party provider for others.  It has the expertise and infrastructure to keep growing this “pick and pack” business.  But Kiva – owning it, not just renting it – could provide the last essential component of the next generation of competitive dominance in the space. By this thesis, the facilities and operational expertise that already exist at Amazon get combined with a future-pathway technology to create a logistics service that is domain leading and defensible. That makes sense to me.

Ironically, if my analysis is right (not just boys-with-toys, not just hubris, not merely operational efficiency, not competitive paranoia) Amazon has some gigantic integration challenges ahead of it.  But I wouldn’t bet against them.

Information on Kiva:

Click here for the company’s website and here for a series of videos showing the system in action. Click here for an amusing robotic interpretation of the Nutcracker Suite entitled “The Dance of the Bots.”

Meredith: Focus on the Fleet Feet

The recent acquisition by Meredith Corporation (NYSE: MDP) of Allrecipes.com strikes The Merger Verger as a strategically brilliant deal.  It doubles their digital revenues with the top food website in the world and brings them enormous digital media and social networking expertise. The leverage potential is high, with opportunities to create value from Allrecipes to Meredith and vice versa.

But, having made four acquisitions in the last eight months, the company needs to settle down and make these deals work … now.

Meredith is buying two distinct forms of fleet-footed assets: customers and tech expertise.  Blow the first few months of integration and the acquisition’s value proposition could deteriorate rapidly due to site visitors or employees taking flight. 

Allrecipes.com is a very strong site that has generated a powerful brand.  That suggests a degree of customer stickiness that would in turn suggest focusing first on retaining talent within the organization. 

 

Recommendations for Meredith:

  • Turn the new-deal tap off (or way, way down).  I know that Meredith Chairman & CEO Stephen Lacy sees a host of great media properties available in this post-recession environment but now is the time to “get right” those that he has already done, not get more to do.
  • Communication will be a key part of the integration puzzle.  With such a strong strategic intent, they should be telling anyone who will listen about the benefits available to both organizations by thoughtfully executing on it (and telling it over and over).  Touch the Allrecipes employees, particularly the key IT folks. Get down with them where they are.
  • Having purchased a company with a strong social media component, respect that society.  However alluring the opportunity might be to start selling their other products to Allrecipes customers, do not rush around stuffing them with offers.  Instead, contribute to their social experience, demonstrate the potential of cross fertilization with the other properties and invite them into the expanded world of Meredith.  Pull, do not push.
  • Incorporate Allrecipes.com thought leaders (at multiple levels) into the larger game planning for Meredith’s digital future.  It will send positive signals about the role of “new media” in a historically print-based company and increase the flow of expertise and ideas.  Oh, and listen to the ideas from the Allrecipes guys; their input is not just for show.