Shouldn’t Acquisitions Actually Be Worth It?

by James Brumley | July 3, 2012 10:20 am

Why is it that major corporate acquisitions are touted as the best thing since sliced bread before and when they happen, but you hear next to nothing about them when it becomes clear the buyout was a bust?

Those busts cost investors plenty, too, if not on the operating income statement, then at least on a GAAP basis (and GAAP or not, it all eventually comes out of shareholder value).

Take Microsoft’s (NASDAQ:MSFT[1]) announcement yesterday. The software giant is booking a $6.2 billion writedown on the 2007 acquisition of aQuantive, which was not only a $6.3 billion cash buyout, but — yikes — commanded an 85% premium to aQuantive’s value at the time.

aQuantive was expected to significantly bolster Microsoft’s online ad business. As company spokespeople opined, “This deal takes our advertising business to a new level,” and “We’re happy with the price we paid. We believe it’s exactly the right company to buy so we’re willing to pay the value we are paying today.” Whoops. It did help, but the results fell well short of the anticipated benefit. Thus, the $6.2 billion hit.

Thing is, Microsoft’s aQuantive debacle isn’t an isolated incident. Ill-advised acquisitions end up costing shareholders billions all the time. Don’t believe it? Check out this list of some of the market’s biggest acquisition … and subsequent big writedowns.

Palm Slips Through Hewlett-Packard’s Fingers

In early 2010 — despite the fact that smartphones had pretty much crushed the PDA business — Hewlett-Packard (NYSE:HPQ[2]) saw enough potential in the Palm Treo smartphone and its webOS to shell out $1.2 billion for the Palm company. That was a 23% premium, though given the way Palm was bleeding at the time, many critics were amazed HP bought the company at any price.

The critics were right. In the fourth quarter of last year, Hewlett-Packard wrote down $1.66 billion[3] to just get the disaster off the books.

Countrywide Breaks Bank of America

Back in 2006 and 2007 when selling mortgages was the easiest game in town, it made perfect sense get as many under your belt as you could. And, Bank of America (NYSE:BAC[4]) went for one of the biggest enchilada out there … Countrywide Mortgage. The deal finally went through in early 2008, to the tune of $4.1 billion. Problem is, by that time, the mortgage wheels were already falling off the cart.

When it was all said and done, the purchase of Countrywide ended up costing Bank of America $40 billion, thanks to real estate losses and ballooning legal fees[5] — though only $2.6 billion of the purchase was actually taken as a non-cash writedown last year.

AT&T Can’t Get Hold of T-Mobile

As if failed and stupid acquisitions weren’t frustrating and costly enough, some deals don’t even have to go through to cost a ton of dough. Take last year’s failed bid[6] from AT&T (NYSE:T[7]) to acquire T-Mobile, for instance. The Department of Justice nipped it in the bud shortly after AT&T posed the idea, but still had to cough up $4 billion worth of writedowns just to tie up all the failed merger’s loose ends.

Moral of the Story

And that’s just the beginning. AOL (NYSE:AOL[8]) paid a whopping $164 billion for Time Warner (NYSE:TWX[9]) in 2001. By the next year, the flaws in the union began to dig in, causing a $99 billion writedown in 2002. Panasonic (NYSE:PC[10]) will be writing down its costs for the Sanyo acquisition next quarter, which has not gone as well as hoped either. The list goes on and on, and these are just the big ones. There are plenty more in the “mere” hundreds of millions of dollars range that can nickel-and-dime investors to death — even though we never hear a peep about those.

All of them, however, have one common element: They were deemed to be smart acquisitions before they actually became acquisitions.

The moral of the story? Don’t assume a company’s optimism on its own deals is merited. Too many organizations have more money than brainpower, and all too often acquisitions seem to not only not help, but end up costing more money just to clean up the mess.

Be especially wary of companies with a track record of bad acquisitions[11] … and there are more of them then you might think.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Endnotes:
  1. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  2. HPQ: http://studio-5.financialcontent.com/investplace/quote?Symbol=HPQ
  3. Hewlett-Packard wrote down $1.66 billion: http://investorplace.com/2012/06/crushed-blackberries-rimms-cautionary-tale-for-investors/
  4. BAC: http://studio-5.financialcontent.com/investplace/quote?Symbol=BAC
  5. real estate losses and ballooning legal fees: http://investorplace.com/2011/09/bank-of-america-toxic-assets-countrywide/
  6. failed bid: http://investorplace.com/2012/01/failed-att-bid-gives-t-mobile-new-life/
  7. T: http://studio-5.financialcontent.com/investplace/quote?Symbol=T
  8. AOL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AOL
  9. TWX: http://studio-5.financialcontent.com/investplace/quote?Symbol=TWX
  10. PC: http://studio-5.financialcontent.com/investplace/quote?Symbol=PC
  11. with a track record of bad acquisitions: http://investorplace.com/2012/05/hpq-a-tech-dinosaur-fooling-nobody/

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