Posts Tagged ‘M&A’

The Winner’s Curse is Upon HP and Dell

August 30, 2010 Leave a comment

The world of finance likes to pretend that big deals are driven by rigorous analysis, spreadsheets and efficient negotiations. The truth however is, most deals aren’t any more sophisticated than the frenetic haggling in any Turkish Souk.

Take the ridiculous bidding war between HP and Dell for some obscure pipsqueak of a software company that hasn’t ever made a profit. The ludicrous valuations on offer clearly are not and will never be supported by any objective measurement of value like free cash flow. The prices are going so high simply because neither HP nor Dell wants to back down and lose the bidding war.

This is the primary reason most M&A deals end in failure: buyers pay too much. And when there is a rival bidder, the premium is even more preposterous. The long-suffering analysts who have to keep churning out increasingly implausible post-merger ‘synergy’ scenarios to justify the huge final price are simply the supporting cast in a testosterone-fueled game of ‘my budget is bigger than yours.’

The price paid in any M&A deal is the result of negotiation, and the balance of leverage and desperation between buyers and sellers. Rival bids put the seller in the position of choosy suitor. Like with all things in business, the social psychology of the deal trumps the numbers any day. This is why the winner of the bid has time aplenty to rue their rash enthusiasm.


Mating Season

September 9, 2009 1 comment
I love your big balance sheet

I love your big balance sheet

It’s merger season again. As the dog days of summer wane, torpor lifts and elemental energy returns. Corporate potentates, bronzed and refreshed from summer vacations, resume the old pastime of empire-building. 

The financial crisis has made prey plentiful. Corporations that survived the crisis with balance sheets intact are now swooping upon the runts of the flock. Forced marriages, consensual dalliances and cohabitations of convenience will dominate the business headlines, as the strong swoop upon the weak.

UK mobile phone operator Orange is brandishing a huge dowry likely to make its merger proposal irresistible to the smaller, weaker T-mobile. In the land of superficial vanity and overpriced fashion brands, profitable Jaegar is putting impoverished Aquascutum out of its misery.

However, Kraft Foods’ ambitious attempt to bottle up Cadbury was disdainfully rebuffed by the latter. Maybe Cadbury dislikes Kraft’s crude American accent, or it may be that she will not sell her virtue cheap. Whatever the case, as Kraft revises its marriage proposal and rival bidders like Hershey and Nestle gird their loins, it’s clear that animal spirits have returned to the world’s boardrooms.

The good news is, these ambitious allocations of capital signal that capitalism is alive and well. The recession may yet have legs, but as long as greed survives, the future is bright.

Categories: Business Tags: , ,