Category Archives: mergers and acquisitions

Disney (DIS), Comcast (CMCSA) and Fox (FOX)

June 21, 2018 By in mergers and acquisitions, Uncategorized Tags: , , , , , 1 Comment

I started watching the Murdoch family in the mid-1980s, when I was managing a large Australian portfolio.  The original business of News Corp, the parent of FOX, was politically-oriented media targeted at right-of-center blue collar workers in Australia.  As I saw it, News consistently traded positive news coverage to its right-of-center audience in return for regulatory favors.  Rupert Murdoch’s genius was to replicate this model on successively larger stages, first in the UK and then in the US.

Today–again, as I see it–Rupert is moving to turn the family business over to his two sons, on the idea that they will follow in his footsteps as he did his father’s.  This desire has two implications for the bidding war between DIS and CMCSA for  the FOX media assets:

–the Murdoch family wants equity, not cash.  That’s only partly for tax reasons (because taking cash would presumably trigger a big capital gains bill, while taking equity in the successor company wouldn’t).  Just as important,

–the next generation of Murdochs wants to continue to have a seat at the media table.  The fact that they would own a lot of DIS stock and the fact that there’s no clear successor to the current DIS chairman make it an ideal landing spot.  Comcast, in contrast, is another family-controlled company.  The last thing Comcast wants is to let in a potentially powerful internal rival.  This means CMCSA issuing stock is probably out of the question–and certainly not the favored class of stock the Roberts family uses to maintain control.  So Comcast doesn’t suit the Murdochs at all.

 

Most institutional investors don’t pay taxes, so they’re indifferent to whether they get stock or cash.

 

I don’t think it’s an accident that the Comcast offer for FOX is at a level that more than compensates any long-term holder of FOX for the tax he would owe on selling.  In other words, FOX directors can’t use the grounds that they’re “protecting” shareholders from tax by rejecting the Comcast offer in favor of DIS.  After the Supreme Court ruling allowing the ATT/Time Warner merger, they may not be able to argue that a Comcast/Fox merger would run afoul of regulators, either.

 

At first blush, the Comcast position seems a lot weaker than DIS’s.  The Murdochs want to sell to DIS and, I think, actively don’t want to sell to Comcast.  As for DIS, it faces a continuing problem finding places to reinvest its huge media cash flows.  And opportunities like FOX don’t turn up every day.

What is Comcast’s strategy?   My guess is that it’s hoping to raise the offer price to a point where DIS drops out and public pressure forces FOX to sell itself to Comcast.  From what I can tell, it would likely need a partner to do so.

I’ve got no desire to participate, but this will be an interesting battle to watch.

 

 

Broadcom (AVGO) and Qualcomm (QCOM)

November 6, 2017 By in mergers and acquisitions, Technology, Uncategorized, white knight Tags: , , , , 1 Comment

(Note:  the company formerly known as Avago agreed to buy Broadcom for $37 billion in mid-2015.  Avago retained its ticker symbol:  AVGO, but took on the Broadcom name.  Hence, the mismatch between name and ticker.  That deal is on the verge of closing now. Presumably AVGO’s recent decision to move its corporate headquarters from Singapore to the US is a condition for approval by Washington.)

AVGO and QCOM

AVGO is a company that has very successfully grown by acquisition (my family and I have owned shares for some time).  Its specialty, as I see it, is to find firms with excellent technology that are somehow unable to make money from either their intellectual property or their processing knowhow.  AVGO straightens them out.

QCOM, a firm I’ve known since the mid-1990s, seems to fit the bill.  The company makes mobile processors for cellphones.  It also collects license fees for allowing others to use its fundamental and important cellphone intellectual property.  QCOM has been in public disputes over the past couple of years with the Chinese government, which has forced lower royalty payments, and with key customer Apple, which is threatening to design out QCOM chips from its future phones.  As I see it, these disputes are the reason the QCOM stock price has stagnated over the recent past.

the offer

AVGO is offering $70 a share in cash and stock for QCOM, a substantial premium to where QCOM shares were trading before rumors of the offer began to circulate.  The current price for QCOM (I’m writing this at around 10:30) of $63.90 suggests that the market has doubts about the chances for AVGO’s success.

Standard tactics would be for QCOM to seek another buyer, one that would keep current management in place.  Since an overly pugnacious management has arguably been QCOM’s main problem, my guess is that a second bidder is unlikely to emerge.

If I were to try to participate in this contest (I don’t think I will), it would be to buy more AVGO.  I believe AVGO’s assertion that the acquisition would be accretive in year one.  So it’s likely to go up if the bid is successful.  If not, downward pressure from arbitrageurs would abate.  On the other hand, I don’t see 10% upside as enough to take the risk QCOM will find a way to derail the bid.  After all, it has already found a way to anger Beijing and 1 Infinite Loop.

Jeep as a Chinese brand

August 25, 2017 By in conglomerate breakup, mergers and acquisitions, Uncategorized Tags: , , , , 1 Comment

A mainland Chinese company, Great Wall Motor of China, has recently expressed interest in acquiring either the Jeep brand + manufacturing operations or all of Fiat/Chrysler.

The press has since been filled with commentary whose thrust is that Washington will oppose either sale proposition.

Several things strike me as odd about this:

–brands like Volvo and Jaguar have looked a lot more interesting recently since coming into Asian hands, so that shouldn’t be an issue (although this is likely the crux of the matter)

—Jeep is now part of an Italian company   …which bought it from a German firm that was slowly sinking under the weight of a senescent Chrysler   …which had been foundering despite a government bailout in the 1970s and a huge injection of badly needed engineering talent under Daimler.  So a firmer economic footing for the whole Chrysler enterprise is unlikely to come without outside-the-box thinking.  Also, it’s hard to make a logical argument that foreign ownership for any part of Chrysler is a problem

–if the Great Wall Motor interest is real, it suggests the company has access to foreign exchange at a time when Beijing is cracking down on reckless foreign m&a by domestic corporations.  That likely means that Great Wall has enough influence in China to be able to expand the Jeep brand’s reach quickly

–I haven’t heard a lot of posturing from Washington.  Either I’m really out of touch on this one, or the anti-Great Wall sentiment is mostly in the minds of reporters.

Blue Apron (APRN) at $5+

August 15, 2017 By in mergers and acquisitions, Uncategorized Tags: , , Leave a comment

APRN went public less than two months ago at an offering price of $10 a share.  That was down from pre-offer brokerage chatter (which is  always very optimistic) of $15 – $17.   Given that the average cost for pre-IPO shareholders is just above $1.60, though, any double-digit price must have looked good.

Certainly, the possibility of Amazon/Whole Foods as a competitor was–and still is–a worry.  There are, however, others:

–lack of barriers to entry

–churn:  stories that very large numbers of customers who signed up for trials at promotional discounts balked at continuing at the full price of about $10 a meal

–continuing working capital deterioration.  According to the prospectus, at yearend 2015, APRN had $127 million in unrestricted cash.  By 3/31/17, that figure had shrunk to $61 million, despite APRN taking in $121 million through long-term borrowing and advance subscription payments by customers (listed on the balance sheet as deferred revenue).  Looked at this way, APRN’s operations gobbled up over $180 million in fifteen months.  By 6/30/17, the situation was $30 million worse.

As it turns out, one of my sons had a Blue Apron subscription in the months before the IPO.  I helped prepare some of the meals.  I thought the recipes were excellent but that the ingredients supplied suffered from trying to keep costs down.  So I’m not a fan.  In fact, I’m a bit surprised the IPO went as smoothly as it did.

where to from here?

My initial take is that IPOs like APRN or Snap indicate there’s too much cash sloshing around in the system.  That always seems to end up chasing speculative deals.  My hunch is that APRN won’t be a big success without a significant revamp of strategy.

On the other hand, there’s arguably a price for everything.  In addition, the activist investor that pushed for changes at Whole Foods, Jana Partners, has just disclosed a 2% stake in APRN.

…maybe a turn for the better.  But, as things stand now, I’ll be watching from the sidelines.

 

 

Disney (DIS) as a conglomerate

August 11, 2017 By in conglomerate breakup, mergers and acquisitions, Uncategorized Tags: Leave a comment

DIS can be seen as a collection of only loosely connected businesses:  ESPN; the ABC television network; Disney theme parks; and Marvel, Pixar, Lucasfilm and Disney movies.

The sharpest line of separation can be drawn between ESPN (or ESPN + ABC), on the one hand, and the DIS animation, film and theme park businesses, on the other.

When I began to examine DIS stock about a decade ago, my first thought was that the company should change its name to ESPN, to reflect the fact that ESPN represented about three-quarters of the company’s earnings and virtually all of its growth.

That situation has changed dramatically during Bob Iger’s tenure as chairman, on two fronts.

–Iger fixed the formerly ailing Disney movie studio.  He acquired Marvel and Lucasfilms, which provided DIS with rich sources of underdeveloped content, as well as a collection of male characters to balance its previously almost completely female lineup.  In addition, the new characters allowed the theme parks to increase their attractions and merchandising to become a more important part of the profit picture.

–ESPN’s profits stopped growing.  This changed its investment attraction from earnings expansion to cash flow generation.  The shift arguably makes the case for splitting DIS up into ESPN and the residual DIS a stronger one, since the company now seems to consist of an income component and a capital gains one.

Arguably, investors interested in capital gains would pay a higher price for residual DIS earnings if they didn’t have to worry about ESPN.  Income-oriented investors would pay a higher price for ESPN cash flow if it were being dividended to them and if they didn’t have the unwanted risk of the business cycle sensitivity of the residual DIS businesses.

 

why I think a voluntary breakup won’t happen

Two reasons:

–ESPN cash flow may be in slow secular decline.  But it is still a large and convenient source of funding for the rest of DIS, and

–the current market cap of DIS is $160 billion, too large to be a takeover target.  Post-breakup DIS would have a market cap of, to pluck a figure out of the air, $85 billion.  Yes, that’s a large number, but it would change the takeover calculation from impossible to hard-but-doable.

So management likely has zero interest in breaking the company up.