Deals from Hell Refuse to Die
10/25/2012 11:21 am EST
The $20 billion Softbank-Sprint deal shows that the Great Recession had little ultimate effect on either magnates' caution or their egos, writes MoneyShow's Howard R. Gold, also of The Independent Agenda.
Remember the great old days of M&A? The days when marquee CEOs with egos the size of Alaska lit up the TV screens with their latest game-changing deals? And when breathless reporters walked away with arms full of awards and fat book contracts for chronicling every twist and turn?
That, of course, was before some of the most spectacular deals came crashing down to earth. Exhibit A, B, and C: AOL-Time Warner (AOL), which was to mergers and acquisitions what Gigli or Showgirls were to movies.
But just when you thought those halcyon days were over, Japan’s Softbank announced it would take control of Sprint Nextel (S), a perennial money loser that ranks a distant third among US wireless carriers behind Verizon (VZ) and AT&T (T).
Unveiled last week in Tokyo by Softbank’s billionaire chairman Masayoshi Son and Sprint’s CEO Daniel Hesse, the complex deal would cost Softbank $20 billion in borrowed money and still leave it with only 70% control; the rest of Sprint’s stock would be publicly traded. It would be the biggest purchase ever of a US company by a Japanese-based firm, topping the 1989 landmark acquisition of Rockefeller Center by Mitsubishi Estate.
The money would help Sprint pay off a mountain of debt and gear up for war against the wireless giants. Son views this as a disruptive merger modeled after his own challenge to the duopoly atop Japanese telecom through his 2006 acquisition of Vodafone Japan.
Son is a true maverick, the grandson of immigrant Korean pig farmers who became an entrepreneur when he studied at UC Berkeley.
“Taking up a challenge always entails a big risk,” he said. And in a subsequent interview, he added: “If I didn’t have any interesting strategy, I wouldn’t bet $20 billion.”
This bravado was so familiar I decided to look into what makes some mergers work while others fail—and what it means for investors. So, I contacted Robert Bruner, dean of the Darden School of Business at the University of Virginia and author of the aptly named 2005 book, Deals from Hell.
“Failure pervades business, and most firms fail eventually,” he wrote—but M&A is generally not a loser’s game. In fact, Bruner found that on average, mergers and acquisitions do just about as well as any corporate investment.
But some mergers are better than others.
“The best deals are pretty focused—in adjacent areas,” he told me. “The value destroyers tend to be...in wholly unrelated areas.”
In other words, when companies go too far afield, they’re asking for trouble.
- Read Howard’s analysis of the three most overvalued asset classes.
That’s also true geographically. Foreign bidders pay more than domestic ones, he said, helping investors in US target companies, but not necessarily the acquirers.
Indeed, Bloomberg BusinessWeek reported that the ten biggest overseas acquisitions by Japanese companies from 2000 to 2011 led to a horrendous 26-trillion-yen ($330 billion) loss of market value within 12 months.
NEXT: Bigger Isn’t Better|pagebreak|
And when it comes to M&A, bigger is, well, badder. A study of 12,000 acquisitions by public firms between 1980 and 2001 showed that shareholders of large firms lost $226 billion when those acquisitions were announced, while small-firm shareholders actually made $8 billion.
And finally, private trumps public. “The best deals are associated with negotiated agreements of private firms,” Bruner told me. Good acquirers, he said, are strategic and “very disciplined.” No impulse purchases here.
So, M&A that produces good returns usually:
- involves smaller, privately owned firms;
- addresses a real strategic need;
- offers genuine synergies;
- comprises companies that are close geographically and operationally;
- and comes at a reasonable price.
By contrast, deals from Hell often include:
- companies in unrelated markets;
- companies paid for with stock;
- a vague strategic rationale;
- high premiums or bidding wars;
- glamour or a CEO’s ego.
And that brings us back to Sprint and Softbank. The latter, incidentally, did not respond by deadline to e-mailed questions I sent them.
- Read Howard’s take on how shareholders are pushing back against imperial CEOs.
Both companies have done their own deals from Hell. The Wall Street Journal nominated Sprint’s own 2004 acquisition of Nextel as one of the worst acquisitions of the decade. The combined company wrote off $30 billion in 2008, “pretty much the entire stock value of Nextel before the deal was announced,” the Journal reported.
And remember when Softbank’s Son snapped up the company that ran computer trade show Comdex for more than $800 million in 1995, only to essentially liquidate it a few years later? Comdex’s owner, who sold at the top of the market, used that money to build a Las Vegas casino and eventually a global gambling empire. His name is Sheldon Adelson, and I hear he’s playing a small role in the 2012 election.
- Read the final tally of which side lied more in the presidential debates at The Independent Agenda.
Son, of course, has had plenty of successes; otherwise, he wouldn’t be Japan’s second richest man. But he prides himself on being a risk-taker, and there are plenty of warning signs this time around.
"I'm a man,” he said. "It's part of my male ego to strive to be No. 1.” I’m not making this up.
“The deals from Hell have in common CEOs who display a lot of hubris or pride or overoptimism,” Bruner told me. “This suggests someone who is forging ahead in the face of considerable risk. It may warrant caution or staying on the sidelines.”
I’ll be more blunt: If you’re a Sprint shareholder, I’d take Softbank’s money and run like a thief. If you’re anybody else, I’d run as far as possible from this deal and others like it.
Howard R. Gold is editor at large for MoneyShow.com and a columnist for MarketWatch. Follow him on Twitter @howardrgold and catch his coverage of the 2012 election at www.independentagenda.com.And don't miss next week at MoneyShow.com: Our exclusive MoneyShow.com/The Independent Agenda Investor Class Poll on the 2012 election.