Mergers, Acquisitions and Spinoffs are Board Games Played with People
“That is just the beginning. I’ve seen things you’ve only seen in your nightmares. Things you can’t even imagine. Things you can’t even see. There are things that hunt you in the night. Then something screams.” – ‘Alan Parrish, “Jumangi,” Columbia Pictures, 1995
A while back, I figured out that the CE (consumer electronics) industry– or the complete technology industry, for that matter – is a fashion industry. The minute someone introduces something that’s hot and sexy the agile ones run out and schedule their well-staged major announcement (along with the obligatory “leaked” insider scoop) and it’s dubbed an innovation. Then, at the next CES (Consumer Electronics Show) a gazillion copies appear. With the latest rush of corporate breakups, I’ve realized business is just filled with fashionistas. Hemlines go down, turtlenecks emerge and management is on the hunt to buy someone, something to be bigger, better and able to do it all. Hemlines go up, necklines plunge management streamlines for action … “We need to be lean/mean in today’s environment.”
Fashion Change – Whether it’s the push of financial institutions, the economy or a search to find the magic key to increased profits; businesses go through fashion cycles similar to the clothing industry. Up, down, sideways.
Back when the financial market was in the toilet (the recession of 2008), funds rushed to invest in companies that were big and diverse. The idea was when one group was in a slump, the others could pick up the slack and things would be “stable.” Now that the good times have returned, the funds aren’t satisfied with decent growth. They want spectacular growth so they can take home big stacks of money.
Betting the Odds – Hedge funds and activist investors are increasing their ability to change the course of companies by merging/splitting companies and gathering considerable payments at the same time. If the management team is good, they’re constantly looking at their options – build it/develop it organically or buy it. It’s all about investment time/people/money vs. time to market. Buying (acquisition) sometimes makes a lot of sense. Over time, a company’s focus changes and product lines/groups don’t fit with the current direction so they spin them off or sell them to someone else. Don’t like it? Invest elsewhere. IBM has followed that path that financier Charles Flint set forth that merged three companies into one which, over time, became one entity. Like GE, IBM has had a history of ups/downs, good/bad. IBM quietly acquired companies and the product lines they needed.
When things didn’t fit (such as their PC and server businesses), they put them on the auction block. Everyone has said the PC business is dying so it was considered a smart move. The fund boys rubbed their hands with glee and thought they had really put one over on those Chinese investors.
Focused Efforts – While IBM looked at the notebook and server industry and saw minimal growth compared to the cost, Lenovo has been able to turn their product line purchases into solid growth and profits. And no, it’s not because they’re made cheaply; it’s because they have management’s attention. Well holy crap, it’s really a good business if you give the customers the products and attention they want and need. PCs aren’t enjoying the growth they did years ago, but no industry or product segment can sustain 20-30 percent annual growth forever. Still, Dell is doing a decent job in the PC/server market. Michael Dell and Alan Parrish reassured the folks saying, “Don’t worry. I’ve done this before. Once.” Add to that the increased market share Apple has gained with its Mac line (O.K., getting kids hooked on iPads/iPhones helped produce converts), and the computer segment is enjoying solid sales and reasonable profits. But today, we have fundies running around the industry goosing management to make them even more money. Alan Parrish noted, “You gotta’ roll with the punches.” To beat the divesture/spinoff rush, eBay decided PayPal would be able to do better in the marketplace if they “let it” stand on its own and no, the pre-announcement of Apple Pay, had nothing to do with it.
- Apple had already lined up most of the credit/financial institutions to support them.
- Apple had arguably the largest share of smartphone sales (there are 150+ versions of Android, so each needs to be considered separately).
- iPhone users love to tell you they have an iPhone. (The rest say, “I have a smartphone.”)
- iPhone users really use their iPhone for shopping, researching, music, video, posting (most of the rest use ‘em for calls/email).
With things looking up for the “activist investors,” they know a good thing when they smell one.
Company Hunters – Hedge Funds and activist investors focus on taking advantage of companies in the herd that may have temporarily lost their way, are recovering too slowly (in their opinion) or don’t meet their definition of best use of reserves and attack. And there is plenty of blood to be let as the surge of big spinoffs (and speculation) proves:
- EMC – look, the boss is leaving, so let’s split it into a software firm (VMware) and hardware commodity seller.
- Symantec will split because that brilliant investment in Veritas backup/storage management just isn’t working with its security business and each new messiah failed.
- Times Warner slimmed down to its streamlined television and movie studio group and now it’s very appealing to Comcast.
- Dow didn’t split, simply divested business lines.
- GE spun off its retail finance arm and sold its appliance business.
- The pack keeps nibbling at Microsoft to split its software, video games, search and cloud businesses into separate entities but they’re just exploratory nips … nothing serious yet.
Despite all the BS rhetoric of making the move to make the companies more agile and be in a better position to take advantage of business opportunities, the only winners are the “activist investors.” They get their chunk off the top.
Trends, Cycles – Every product category goes through cycles and increasingly, it’s looking as though companies do as well. At their peak or the bottom of the trough, they’re vulnerable. The endless game of merger & acquisition and spin-offs has been going on for years. More acquisitions and fewer sell-offs when the world economy is good. Fewer purchases and more sell-offs focusing on core competencies when the economy was unsteady.
Volume Grows – Now that the economy shows decent signs of improving, hedge funds and activist investors feel the time is right to grab some quick money and encourage management/boards/shareholders to split firms up.
The latest round of splits that the “activist investors” have encouraged are hailed by these individuals as:
- Victories for shareholders
- Brilliant value-enhancing moves during a turnaround
- Making the firms more nimble
- Improving the company’s focus and simplifying the complexity of the firm
- Eliminating the cross-subsidies and inefficiencies of the organizations
Thanks in no small part to the activist investors and hedge funds, we’ll probably see a record level of spinoffs.
And once these interested parties have cracked open the companies, they’ll move on to the next opportunity they can “help.” As Alan Parrish complained, “Stop giving me things that come apart.” Admittedly, there are a lot they have their eyes on once they strip their money out of their present investments. What will they leave behind? Historically, the stock prices of spinoffs rose but were very likely to be acquired by someone that found the company a desirable commodity. Of course, there was GM’s Delphi spin-off that went bankrupt and Motorola Mobility that got passed around so much the few people who are left aren’t certain where their next paycheck will come from. Then there’s Carl Icahn, who helped eBay and is now trying to help Apple shed some of its reserves. He has an excellent pedigree–just look at how he helped TWA. I really prefer a management position similar to the one Tim Cook expressed earlier this year at the stockholder’s meeting which went something like … if you don’t like what we’re doing, take your investment somewhere else. And when Alibaba went wildly public, CEO Ma laid out the firm’s priorities – customers, employees, shareholders. I like that priority. It’s the reason a lot of companies avoid going public. The added funds are nice; but if management has to focus on quarter-to-quarter profits rather than have a longer view of what is best for their most important assets – customers/employees, then they aren’t managers/leaders.
Money is probably the least important part of the industry’s equation today. Customers are hard to get and harder to keep. They’re acquired by people in the trenches and they’re kept by people in the trenches. Today’s activist investors like Icahn, Singer, Cohn, Whitworth, Elliot and others don’t give a damn about the industry any more than the patent trolls do. To them, it’s just a game that hurts people … customers and employees. When they come hunting, you’ll recall what Alan Parrish warned, “Then you hear them eating, and you hope to God that you’re not dessert”