27 April 2010

M&A - good or evil ?

Hertz announced today its acquiring Dollar/Thrifty for $1.2B. My initial reaction was "Great, rates are going to go up." And they will. I was also reminded of how I really never understood a rental car company's business model. I was in philly a few weeks ago and rented a midsize car for $40 for three days. And that was after $15 of airport fees. No advance reservation required, no cancellation fees (you can just not show up and you won't be billed). How does this business make money? I heard its on insurance (vis -a vis-the Circuit City "warranty" model) - we know how that generally works out in the long-run.
It may be at the business-customer level. But I digress.

It got me thinking about something very personal. Is M&A good or evil ? Is it a net gain or loss for society as a whole ? Being a corporate M&A guy, it behooves me to think the former, otherwise it's like I'm working for Microsoft :). But looking at it from a purely long-term, Atma standpoint, i'm not so sure. Just to clarify, i'm talking about mega-mergers such as the Hertz/Thrifty deal.

First - lets look at it from a shareholder point of view. Everyone's heard the old adage that at least 80% of all mergers fail to create shareholder value. The hedge funds have this right - buy the acquiree, short the acquiror. Synergies are never fully realized, but more often than not, it comes down to simply overpaying. So why does EVERY corporation try to beat the odds? The quick answer is that Management is incentivized to do so. It's much easier to do one big acquisition then try year over year, quarter over quarter, to churn out consistent growth. But in the end, shareholders always lose.

Now - the employees. Initial view is that layoffs are always part of a megadeal. "Cost synergies", while I argue should be last on the list of benefits, are always the first to be announced. It's almost as important as the deal itself. Although short-term, this looks like a negative, it may not be in the long-run. If the company being acquired is poorly run or not competitive, a merger may actually save more jobs than the failing company could do on its own. Its sort of like the concept of "outsourcing". Even though its a net gain to the US (US multi-nationals realize the biggest returns on outsourcing), people are a bit myopic and see the short-term cuts as bad. So my vote here is that its "too close to call."

Now us as consumers. We ALWAYS lose. Even if some synergies are realized, those profits stay within the companies (look at the massive cash balances on most large company's books) or show up as bonuses to executives. Plain and simple - there is one less competitor in the marketplace. The impact varies from case to case. If #1 buys #2, forget about any consumer benefits. If #1 buys #10, it may have a much lesser impact. But the impact will generally be negative nonetheless. Prices generally rise (after an initial integration period where companies change as little as possible so they don't frighten away customers and other stakeholders), and selection generally drops. With Hertz, you're going to get increased pricing all around. Has anyone bought a razor blade under $20 bucks these days? Gilette (now P&G) did a great job of swallowing its peers. Look at consolidating markets; it's hard to find true competition in those arenas. The good news is technology and internet are game-changers that will impact even the most monopolistic industries.

So what about the historical strategic deals ? You know those instances where 1 + 1 = 3 ? The ones that the thought leaders describe as brilliant, or light years ahead of its time ? AOL + Time Warner. Sprint + Nextel. Can anyone name any of these that fit this category ? Any ideas ? I can't think of one.

So who wins? Well, for one, its the bankers and attorneys. The fees generated are sick. I'm all for the market dictating the price for goods and services - but even a free market capitalist like me has a hard time justifying the excessive advisor fees. For two, its management. I alluded to this earlier, they all have employment agreements which pay huge sums of money (in the form of cash, unrestricted stock, in the money options, etc..) for a "change in control." Huge. All in, these fees can easily total 10 -15% of the overall deal size (depending on circumstance of course). Hard to find synergies to compensate for that ? So are they acting in the best interest of sharholders or themselves ?

So all signs point to Evil ? We'll i hate to sound like a cynic, but generally on the mega deals, I think its true. There is so much execution risk and so many wrong incentives by executives trying to "push" deals through that shareholders, employees (maybe), and consumers are generally worse off.

So where is the good ? I think its in upstarts. In new ideas not acquired ones. Businesses built from the ground up, not from the top of the ivory tower. It's the Buffets, and Rockfellers, yes and even the Gates of the world that become respected industrialists by just that. They weren't "Barbarians at the Gate" or financial engineers, or even people that buy companies for a living (present company excluded). So in my opinion, business is good if it creates a tangible benefit to consumers, not just recycled through retained earnings.

So you tell me, is this post good or evil ? Right or Wrong ?

25 April 2010

tea parties and obama-nomics

So despite being a self-proclaimed liberatarian, I haven't quite yet joined the ranks of the tea partiers. Less is more when it comes to government, but there are too many scary people involved in the latest fad (read: palin).

I'll admit, i was charmed by the spell of Obama in 2008. He was so pragmatic, technologically savvy (I was impressed by his grassroots online platform), and seemed to "get" the new world from a new generation's perspective. As small government minded as I am, I thought he would take a practical approach to healthcare, world politics, and the new economy. Plus, I think everyone, including myself, was still reeling from the bluderous Bush years from ill-fated wars to the distarous "relief" in my homebase of Lousiana after Katrina.

A year or so later, I am disappointed in how foolish I was. I feel like a grandma who just bought some magazines in hopes of winning the $1M sweepstakes. Turns out, not only was Omama a Pelosi-esque "tax and spend" extremist liberal, he possessed the dangerous charisma and political knowhow to get bad legistlation passed. And the next generation will be left to suffer the consquences.

I, like most people, think universal healthcare is a good thing. I think all people (not just americans) have the inalienable rights of adequate health and education. Everyone deserves this much. But strong-arming a bill that makes no systemic changes to our broken system and doing so with outright misrepresentations (10 years of revenue and only 6 years of costs in their $1T 10 year estimated costs).

Who will be hurt the most ? In reality, all of us. Small businesses will employ less people or face stiff penalties. Everyone get ready for queues to your internist. Taxes will now see the same hockey stick growth unseen since the dot-com growth projections. Does everyone know that a VAT tax is not optional but imminent? This will happen. Can you believe it ? Obama actually sees Europe as a model for America. Has anyone looked at unemployment, prosperity, and GDP growth historically in the US compared to Europe ? There is no comparison.

Don't believe me that it doesn't work? Compare Texas to California. California is riddled with red tape, beauracracies, and a tax and spend governmental DNA so deep that even the "Terminator" could not change the state of affairs. Where are they now? Businesses can't find exits quick enough. The government is issuing "IOUs" because they are near bankrupt. Nice job Pelosi. Texas, on the other hand, is business friendly, has no income tax, and a free market system. How are they doing in the downturn ? Unemployment 2-3% less than the overall nation. 4 of the Top 6 growing cities last year. For the first time this year, Texas tied California for tops in the number of Fortune 500 companies headquartered in a state (guess at who's expense!). Look at the Austin real estate market; Its propped up by all of the Californians planning their move. The only downside is that the recession highlighted the sucesses of Texas and now people are flocking in huge numbers. Stay out! Collect your IOUs and continue to tax others for your never-ending entitlements.

So Bush doesn't look so bad after all ? No, he still does. I can't put the federal deficit on just Obama. I think Bill Clinton had it right. I know he was fortunate that he governed during the boom times so had a big pile of tax revenues at his disposal. But he did good things in the right way. He protected the integrity of free markets, opened international trade, reduced spending, created welfare reform, and did generally "moral" things with respect to social issues. And never mischeviously or through brute political force that Obama and Bush did. I never thought I would say this, but perhaps we all should have voted for Hilary....Or maybe Ron Paul.

intro to atma

There are many places that detail the philosophy of Ayn Rand and its current day relevance. While her writings have built the foundation of my views, particularly as it applies to the "morality" of business; this is not what Atma attempts to do in its blog.

Here is where I rant. About what I enjoy the most. Business, strategy, the philosphical underpinnings of current events within the context of my core beliefs. What I envision is a southern style gumbo of wsj, unapologetic capitlism, and modern day hinduism. Only you can tell me if this needs slightly more cayenne or that we should just start over from scratch.

How do disruptive concepts and innovative companies such as google or starbucks preach the Rand way of life ? Why do rackets such as the mls and real estate agents need to face real competition like newspapers have ? What is fine line between free market and "american greed" ? These are just a few of my ideas...

John Galt turned his back to society when the unrelenting demands of an entitlement-driven society asked for more. While I generally agree, I take a more balanced approach. Like Alan Greenspan recently said during the aftermath of the financial crisis, he was shocked that his core belief of "free markets" failed for the first time. It seems like they do from time to time (albeit very rarely), and I want to contemplate why.

Hopefully for the few that will read this, atma will lead to open, balanced discussions, new approaches to business, and thought-provoking, philosophical-driven debates about the current market headlines. Hope you enjoy.