What does a CEO do when the economy is in a persistent down turn and your business cannot expand or grow? Jump at the time tested strategy of acquisition to gain market share seems to be the response in 2015. Yet a merger is no sure thing. Anyone remember AOL’s deal to buy Time Warner. How did that turn out? Just how much additional efficiency can be squeezed out of any company? In the era of part time contract workers and low wages, all the fat has been long gone. As for research and development in new technology or products, how will such innovation be marketed in an economy infatuated with the promise of Amazon Prime drone deliveries?
These simple questions cannot escape the pattern that surviving corporations are getting bigger. The easy way to pad sales and boost cash flow is to combine current operations. However, as any experienced manager knows, melting different corporate cultures into a smoothly greased machine can be a difficult task.
So let’s look at what a Wall Street Journal report says about Year in Review: Mergers Set a Record as Firms Bulk Up.
“Companies around the world struck $4.6 trillion worth of takeovers in 2015, edging out 2007 to be the biggest year ever for such combinations, according to Dealogic. U.S. corporations led the charge, inking $2.3 trillion in deals—also a record.
There is another number that perhaps best captures the moment: 58. That is how many mergers topped $10 billion, well ahead of the prior high of 43 in 2006.”
Access to cash is no impediment to M & A under the Fed’s easy money discount window. The bean counters and corporate lawyers keep burning the midnight candles to close all these deals. Once upon a time Wall Street was about raising capital to fund new business ventures. Could this surge in Corporate mergers and acquisitions are on a record pace this year, be a return to funding real business financing? James F. Peltz offers this assessment.
A company’s desire to buy another is one thing; ability is another. This year companies have been able to strike such a massive number of deals for several reasons.
With interest rates still low, businesses can borrow relatively cheaply to finance takeovers. The stock market, despite severe bumps late this summer and last week, remains at near record-high levels, and that gives buyers a strong currency to help pay for deals.
Also, “companies got lean during the recession and during that time they accumulated cash” they can now use for acquisitions, Lloyd Greif chief executive of Greif & Co., said.
At the end of the year, the important forecast for 2016 needs to look at the direction of the economy based upon this rush to remove competitors from the market place. The dominate motivation behind mergers and acquisitions are not tax advantages, inversion benefits or business growth. No the definitive motivation is to create a more comprehensive monopoly.
An illustration of this conclusion came on December 11, 2015. DUPONT AND DOW TO COMBINE IN MERGER OF EQUALS announcement is significant.
DuPont (NYSE:DD) and The Dow Chemical Company (NYSE:DOW) today announced that their boards of directors unanimously approved a definitive agreement under which the companies will combine in an all-stock merger of equals. The combined company will be named DowDuPont. The parties intend to subsequently pursue a separation of DowDuPont into three independent, publicly traded companies through tax-free spin-offs. This would occur as soon as feasible, which is expected to be 18-24 months following the closing of the merger, subject to regulatory and board approval.
Both companies are real companies. They produce tangible products and have been blue chip companies started in the 19th century and are classic examples of the functional economy. Note from press release: “Upon closing of the transaction, the combined company would be named DowDuPont and have a combined market capitalization of approximately $130 billion at announcement.”
Compare this value with Facebook Market Cap as of the same December 11, 2015 date, of 288.79 Billion. DuPont has approximately 64,000 and Dow 53,000 employees. Facebook says its workforce is around 11,996. At the end of this year, reflect upon the absurdity of these stock valuations.
So a trivial online and a psycho additive medium of games and chats is worth over twice an amount of two of the most substantial companies with a track record of well over a century of invention and substance. Add to this the insult that they employ ten times the people that work for the Zuckerberg social service.
Is this the kind of business model that will buy out the life blood of capital funding in the future? Before one breaks their piggy bank to invest in tech nirvana; a note of caution. Yahoo used to be bigger than Apple, Google, and Amazon. Now it might sell itself for scrap, is a sobering tale of how fleeting valuation success in the business world can be.
What most people miss or ignore is that many of the high flyer companies are really fads being mismanaged by egomaniacs using an iPhone.
Markets that transact in products that keep the nuts and bolts economy running serve a legitimate and useful purpose. Consumer trends that become all the rage seldom have the ability to match the longevity of companies like Dow or DuPont.
When basic economic needs become isolated and are replaced with mindless and trifle induced diversion, the financial community risks dealing in fantasy instead of basic requirements. Do not look for a merger of DraftKings and FanDuel anytime soon. Understanding the difference in Wall Street hype from sound business investments is a distinction that any capitalist needs to understand.
Mergers and Acquisitions should continue into 2016 as long as the entire market does not crash and burn. In the end, necessary industrials will outlast the superficial. Life is not a virtual reality, nor is commerce a quote on a stock exchange.
James Hall – December 30, 2015