The departure of the latest CEO at Unisys brings back memories of perhaps the most disastrous attempt at consolidation in the history of the computer industry, a fiasco that is worth studying for any company that is considering taking advantage of the sharply lower stock prices to make its own attempt at consolidation.
As regulators, investors, and managers grapple with the deepening economic crisis, the question being asked by everyone is “Who’s next?” Who will join Bear Sterns, Lehman, Merrill Lynch, Fannie Mae, Freddie Mac and AIG on the failure list? We think that’s the wrong question. The strategies that doomed these companies were unleashed years ago, and whether or not others will be destroyed by the rising floodwaters will mostly depend on factors outside of their control. That’s not to say that managers at Washington Mutual and others rumored to be at risk should not bail water as hard as possible. The more important question, however, for those who through good management (or good fortune) managed to stay healthy is what they do now.
Bank of America’s hasty decision to buy troubled Merrill Lynch for roughly $40 billion gives us pause because it seems to rhyme with Conseco’s disastrous purchase of Green Tree Financial in the late 1990s. The Green Tree acquisition proved to be so toxic that Conseco soon took billions of dollars in writeoffs, then filed for bankruptcy protection. It was the third largest bankruptcy in US history up to that time.
While consultants may get paid big bucks for their advice, two consultancies’ merger dealings show judgment that is, at best, suspect.
All the merger talk in the airline industry reminds us of many of the consolidation stories in our research–stories in which a perfectly rational argument could be made that there needed to be fewer players in a maturing industry, but in which those companies that tried to lead the consolidation got clobbered. So, we take it as a good sign that British Airways, American Airlines and Iberia Airlines are forming an alliance that will provide many of the benefits of consolidation without forcing them to go through the mess that has historically been associated with airline mergers.
When we started writing this blog, a friend challenged us: “So, what strategies will work? You tell me about all these ideas that aren’t going to pan out. What deals do you like?” We actually like a lot of deals. We’ll start today with the Waste Management proposal to buy Republic Services for $6.73 billion. [...]
While hedge funds aren’t always known for having companies’ long-term interests at heart, the Harbinger Capital fund seems to be doing Cleveland Cliffs a big favor. Cleveland Cliffs recently announced a roughly $10 billion agreement to buy Alpha Natural in what seems to be a classic case of a misguided consolidation strategy, but Harbinger Capital is using its 16% stake in Cleveland Cliffs to oppose, and probably block, the deal. Other Cleveland Cliffs shareholders should send Harbinger manager Phil Falcone big wet kisses.
Rumors of Yahoo’s interest in AOL, as recently reported in Fortune, give us pause. We understand Yahoo’s proclivity to do a deal. Advertisers and investors are flocking to Google, even though Yahoo remains the top site in terms of user traffic. As a result, Yahoo’s profits have been disappointing, and its stock is down almost [...]
