Acquiring companies is fun. There’s nothing like the smell of freshly baked bran muffins brought into a four-star hotel suite where investment bankers and lawyers wearing pin-striped suits, paisley ties and black wing-tips spent the night battling each other over the fate of a multibillion-dollar enterprise.
But after the high-fives are exchanged and the expense account receipts are turned in, the hard work of merging two large organizations begins. That’s when things can go horribly wrong for shareholders, because those closest to these deals often overestimate their benefits and underestimate their hassles.
Research shows about 75% of deals fail to deliver on their intended value. Undoing a bad deal is difficult because every buyer knows the seller is trying to extricate themselves from a bad situation. Usually, it’s a fire sale. For investors, it’s a depressingly common situation. Here are some recent examples of what we call do-over deals.
Nokia and Siemens
Nokia Corp. (NYSE: NOK) and Siemens AG (NYSE: SI) created a joint telecom equipment venture in 2007, and was a disaster from the start. Its launch was delayed because of a corruption investigation involving several Siemens executives. Nokia Siemens Networks has lost money since its founding, according to media reports.
Earlier this month, Bloomberg News reported the companies were “still in talks with ‘multiple partners’ to sell a stake in Nokia Siemens Networks after a newspaper report that KKR & Co. LP and TPG Capital pulled out of the bidding.” Nokia and Siemens are looking to unload a majority stake in their money-losing telecommunications joint venture for $2 billion, according to the Wall Street Journal.
When Rupert Murdoch’s media empire News Corp. (NASDAQ:NWS) acquired Intermix Inc., parent of Myspace, for $580 million in 2005, the Australian-born billionaire described the deal as “an ideal foundation on which to meaningfully increase our internet presence.” He was dead wrong. The MySpace acquisition was such as a disaster that it will be dissected by business school students for generations.
According to a recent story in the U.K.’s Daily Mail, bidders are reluctant to pay the $100 million minimum asking price for the social networking site that wound up as road kill on the information superhighway.
Consumer groups were not happy that the government approved CVS Caremark (NYSE:CVS) merger del. The $26.5 billion takeover of pharmacy benefits company Caremark by CVS in 2007 was bad then, and they still don’t like it now. The transaction brought the retailer into the pharmacy benefits management business.
“But that dual role of retailer and middleman is now raising questions among consumer groups and investors alike,” according to an April report in the New York Times’ DealBook site, adding that five consumer groups have written the Federal Trade Commission arguing the merger has harmed consumers. That, along with pressure from state attorneys general, is depressing CVS’s stock, which has underperformed its rivals. Caremark’s service problems didn’t help. A sale or spin-off seems increasingly likely.
Late CEO Frank Lanza created L-3 Communications Holdings (NYSE:LLL), the Pentagon’s ninth-largest defense contractor, through 80 acquisitions. For a while, the strategy worked well. Sales at the New York-based defense contractor rose 26% between 2006 and 2010 as L-3 benefited from the surge in Pentagon spending on the sophisticated electronics that are its specialty. But Lanza died in 2006 without a clear successor, and the company just couldn’t find a way to rebound after the market tanked in 2008.
As defense budgets got squeezed, the company began to falter, and this week, activist investment firm Relational Investors disclosed that it was the company’s largest shareholder, igniting speculation of potential sales or spin-offs. Separating the winners and losers from such a large portfolio might be a challenge.