Thursday, September 17, 2009

Wall Street's Biggest Con Is M&A 'Advice'

From the Wall Street Journal:

Kraft's quest for Cadbury is the latest episode in the empty pursuit of M&A

As the market cheers Adobe Systems Inc.'s planned acquisition of Omniture Inc. and Kraft Foods Inc. mulls its next move in its bid to buy Britain's Cadbury PLC, Wall Street is abuzz with the possibility of a new wave of mergers and acquisitions.

Before we rush headlong into the deal frenzy, let me have my Kanye West moment or, if you prefer, Joe Wilson moment, and offer an alternative view.

M&A is a mostly empty exercise built on promises of profits and efficiencies that rarely come to fruition. Companies almost always overpay for their targets, hurting their shareholders and enriching few except the CEOs who do deals and the investment bankers who goad them into the next must-have merger.

The roadside is littered with deals that promised great things and went bust. Is it any surprise that the serial dealmakers of the financial world -- Citigroup Inc., Bank of America Corp. and American International Group Inc. -- are at the center of the nation's financial malaise?

Bank of America, it should be noted, couldn't contain itself even as the pillars of the financial industry were shaking. It struck a questionable deal for Countrywide Financial Corp. early in 2008 and added Merrill Lynch & Co. -- maybe the biggest botched deal in the last decade -- a few months later.

Multiple studies have shown no evidence that shareholders of acquisitive companies do better than their stingier counterparts. Some companies are able to wring costs from acquisitions, but usually don't. Close to 90% of European mergers fell short of their objectives in 2007, according to Hay Group.

[merger fees]

With so many deals failing to meet expectations, it would seem that corporate boards and CEOs would be skeptical of the practice. They aren't though, not when presented with smooth-talking investment bankers whispering in their ears and financial incentives awaiting them.

For buyers, the opportunity to pad future earnings and mask a lack of growth is just too tempting. Kraft executives, bogged down in its current markets, need Cadbury to, in the words of one analyst, "fill a gaping strategic hole." That is: Cadbury knows how to innovate and sell in emerging markets, a front where Kraft has conceded defeat.

The state of affairs at Kraft created a big opportunity for dealmakers....MORE
HT: The Columbia Journalism Review's The Audit blog who write:

A
WSJ Deal Column After The Audit’s Own Heart

It’s not often you see something like this in the financial press.

David Weidner writes on The Wall Street Journal Online that mergers and acquisitions suck—or to put in his headline’s words: are “Wall Street’s Biggest Con.”

This ought to be dropped into every deal story as the boilerplate “to be sure” paragraph:

M&A is a mostly empty exercise built on promises of profits and efficiencies that rarely come to fruition. Companies almost always overpay for their targets, hurting their shareholders and enriching few except the CEOs who do deals and the investment bankers who goad them into the next must-have merger.

Ouch. Also: all true....MORE