MERGERS & ACQUISITIONS

“While deals often fail in practice, they never fail in projections – if the CEO is visibly panting over a prospective acquisition, subordinates and consultants will supply the requisite projections to rationalize any price” Warren Buffett

“The fact of the matter is that, for most declining businesses, management tends to redeploy cash flow into things outside of their core competencies in a desperate attempt to save their jobs. In the case of Kodak, they took some of their patent proceeds and cash flow and invested in a printer business, which is another declining business model.” Jim Chanos

“What really counts is whether a merger is dilutive or anti-dilutive in terms of intrinsic business value. We believe calculation of dilution from this viewpoint to be all-important (And too seldom made)” Warren Buffett

“Managers and directors may sharpen their thinking by asking themselves if they would sell 100% of their business on the same basis they are being asked to sell part of it [as exchange in a scrip merger/acquisition]. And if it isn’t smart to sell all on such a basis, they should ask why it is smart to sell a portion” Warren Buffett

"I will tell you a secret: Deal-making beats working. Deal-making is exciting and fun, and working is grubby. Running anything is primarily an enormous amount of grubby detail work . . . deal-making is romantic, sexy. That's why you have deals that make no sense."   Peter Drucker

“With acquisitions, patience is a virtue .. as is occasional boldness” William Thorndike

“Two thirds of acquisitions don’t work. Ours work because we don’t try to do acquisitions — we wait for no-brainers.” Charlie Munger

“Research by McKinsey concluded that about one-third of deals create value, and the other two-thirds are value neutral or value destructive”  Michael Mauboussin

"The most successful overall record on acquisitions has usually been made by companies that are not constantly seeking such acquisitions but that only make them very occasionally when all measurable factors seem overwhelmingly propitious, and when the acquired company is in a field closely related to the existing company's activities. The occasional deal of such a company is usually a good deal for the stockholder because the acquiring company "only does what comes naturally" and is not straining to be making "deals" all the time" Phil Fisher 1960

“We believe most deals do damage to the shareholders of the acquiring company. Too often, the words from HMS Pinafore apply: "Things are seldom what they seem, skim milk masquerades as cream." Specifically, sellers and their representatives invariably present financial projections having more entertainment value than educational value. In the production of rosy scenarios, Wall Street can hold its own against Washington” Warren Buffett

"Why do mergers and acquisitions carry such a high degree of risk?  In almost all cases the seller, who has operated the business for years, knows much more about it and its weak spots than does the buyer" Phil Fisher

"Many acquisitions do not turn out as planned.  The sellers know more than the buyers and may know of problems or uncertainties that are not apparent to the buyers" Ed Wachenheim

“The most frequent question managers ask is whether the transaction will dilute EPS over the first year or two. Given the popularity of EPS as a yardstick for company decisions, you might think that a predicted improvement in EPS would be an important indication of an acquisition’s potential to create value.  However, there is no empirical evidence linking increased EPS with the value created by a transaction.   Deals that strengthen EPS and deals that dilute EPS are equally likely to create or destroy value.” McKinsey Report

"In contemplating business mergers and acquisitions, many managers tend to focus on whether the transaction is immediately dilutive or anti-dilutive to earnings per share (or, at financial institutions, to per-share book value). An emphasis of this sort carries great dangers. Going back to our college-education example, imagine that a 25-year-old first-year MBA student is considering merging his future economic interests with those of a 25-year-old day laborer. The MBA student, a non-earner, would find that a “share-for-share” merger of his equity interest in himself with that of the day laborer would enhance his near-term earnings (in a big way!). But what could be sillier for the student than a deal of this kind?" Warren Buffett

“Most conglomerates fail because of financial engineering (issuing stock at 20x to buy at 10x—Buffett likened this process to a chain letter). This practice doesn’t create long term value. The key is to buy great businesses and focus on earning power, not engage in financial engineering.” John Huber

“I have had bad experience with companies making transformational acquisitions.....

An example that sticks in my mind is Thompson Creek Mining, a molybdenum miner. They bought a company with a “shovel-ready” copper and gold mine project and the cost overruns in constructing that mine ended up almost taking Thompson Creek under. What I should have asked at the time of the acquisition was, “If they don’t like the molybdenum business and are diversifying away from it, why do I own the stock?” or alternatively, “If they do like the molybdenum business, why are they diluting their exposure to it by making this acquisition?”

"Now if I see a company I own getting into a different business, even if they can spin a story of why it’s somehow related, my default position is to sell and watch what happens. More often than not those things go poorly, so if it ever does make sense to get back in, there will be a better opportunity to do so.” Jeffrey Shwartz

"The greatest chances of a costly failure occur when a merger or acquisition happens relatively quickly between two companies in quite dissimilar lines that were previously only vaguely aware of each other"  Phil Fisher 1960

"If a company must acquire something, I'd prefer it to be a related business, but acquisitions in general make me nervous. There's a strong tendency for companies that are flush with cash and feeling powerful to overpay for acquisitions, expect too much from them, and then mismanage them. I'd rather see a vigorous buyback of shares, which is the purest synergy of all."  Peter Lynch

“The success rate of “transformational” deals. Large leaps into different industries, tend to be very low” Michael Mauboussin

“A more subtle red flag is when a company is either acquiring other companies or investing in capex projects that are different to what they have done in the past. They pose risks that need to be considered.   The new acquisitions or projects may be different in size and scope, or may be in new areas but, either way, they pose a risk that needs to be considered carefully. This is especially true if the new large project is causing the company to incur more debt.” Ken Stein

"A serious problem occurs when the management of a great company gets side-tracked and neglects its wonderful base business while purchasing other businesses that are so-so or worse (Would you believe that a few decades back they were growing shrimp at Coke and exploring for oil at Gillette).  Loss of focus is what worries Charlie and me when we contemplate investing in businesses that in general look outstanding"  Warren Buffett

"Companies that would otherwise have been a magnificent opportunity for stockholders have a number of times been made quite unattractive by a management with one good line of great intrinsic strength and potential, acquiring several other weak or run-of-the-mill types of business. Usually this is done with the explanation to stockholders that by diversifying the company's activities, the stockholder's position is being strengthened! When this happens, the previous steady upward trend of the price of the company's shares sometimes comes to an abrupt and perhaps permanent halt" Phil Fisher 1960

"It is assumed by many business school graduates, and by almost all consultants, that a corporation can easily improve its outcome by purchasing unrelated or tenuously related businesses... Our experience, both actual and vicarious, makes us less optimistic about easy solutions through business acquisition.  We think undue optimism arises because successful records draw to much attention...  Far too little attention is given to the terrible effects on shareholders (or other owners) of the worst examples of corporate acquisitions" Charlie Munger

"Paying a takeover premium does not make sense for any acquirer unless a) its stock is overvalued relative to the acquiree's or b) the two enterprises will earn more combined than they would separately. Predictably, acquirers normally hew to the second argument because very few are willing to acknowledge that their stock is overvalued. However, voracious buyers -- the ones that issue shares as fast as they can print them -- are tacitly conceding that point. (Often, also, they are running Wall Street's version of a chain-letter scheme.)" Warren Buffett

"In our judgment, onetime acquisitions that enhance earnings by cutting expenses do not represent sustainable growth and are rarely as productive as either management or investors expect." Lee Ainslee

"Buying another company based on the perception of opportunities for cross-selling and other intangible benefits generally represents a much higher level of risk than I believe is justified. Therefore, I concentrate on eliminating redundancies, which measurably reduces the capital required to run the business. Redundancies are much more predictable and transparent than theoretical opportunities to add value" Sam Zell

"There is nothing like success to blind one of the possibility of failure. What tends to inflate the price that CEO's pay for acquisitions? Studies found evidence of infection through three sources of hubris: 1) overconfidence after recent success, 2) a sense of self-importance; the belief a high salary compared to other senior ranking executives imply skill, and 3) the CEO’s belief in their own press coverage” Peter Bevelin

“Managers tend to be reluctant to look at the results of the capital projects or the acquisitions that they proposed with great detail only a year or two earlier to a board.  And they don’t want to actually stick the figures up there as to how the reality worked out relative to the projections. That’s human nature.”  Warren Buffett

"There may be quite a high degree of investment risk in a company that as a matter of basic investment policy is constantly and aggressively trying to grow by acquisition.. it is my own belief that this investment risk is significantly still further increased when one of two conditions exist in a company's organisational make-up. One is when the top executive officer regularly spends a sizeable amount of his time on mergers and acquisitions.  The other is when a company assigns one of its top officer group to making such matters one of his principal duties.  In either event powerful figures within a company usually soon acquire a sort of psychological vested interest in completing enough mergers or acquisitions to justify the time they are spending." Phil Fisher 1960

"In the past, I've observed that many acquisition-hungry managers were apparently mesmerized by their childhood reading of the story about the frog-kissing princess.  Remembering her success, they pay dearly for the right to kiss corporate toads, expecting wondrous transfigurations.  Initially, disappointing results only deepen their desire to round up new toads.  ("Fanaticism," said Santyana, "consists of redoubling your effort when you've forgotten your aim.")  Ultimately, even the most
optimistic manager must face reality.  Standing knee-deep in unresponsive toads, he then announces an enormous "restructuring"
charge.  In this corporate equivalent of a Head Start program, the CEO receives the education but the stockholders pay the tuition." Warren Buffett

"My focus is always on the downside. Overly optimistic assumptions lead to the graveyard of corporate acquisitions" Sam Zell