Earlier this week, Verizon Communications reported its Q1 2017 results that missed Wall Street estimates and said it lost subscribers who pay a monthly bill despite its launch of unlimited data plans. Already in the middle of a mega merger with Yahoo, the company tried to placate Wall Street by announcing that it is now open to deal talks with companies ranging from Comcast Corp to Walt Disney Co. In this report, we examine if these mega mergers really work or are they simply a way to hide poor performance by co-mingling assets, revenues and earnings.
Lets first look at some (a short list) that succeeded:
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The merger of Walt Disney and everything-we-create-kids-
adore Pixar was a match made in cartoon heaven. It is hard to think of what Disney will be today without Pixar. -
Satellite radio would not exist today had Sirius Satellite Radio not joined forces with rival XM Satellite Radio. Since then, big names – Howard Stern, Oprah etc. have become commonplace in satellite radio.
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Exxon and Mobil signed an $81 billion agreement to merge and form ExxonMobil. In creating one of the largest market cap companies that has firm grip on the oil markets, both consumers and shareholders have benefitted.
The list of those that failed runs longer than the number of misleading alternative facts from Press Secretary Sean Spicer. We will highlight only a few here.
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For $11 billion, Kmart acquired Sears in 2005. Sears’ revenue dropped by more than 10 percent in the years following the merger and is now marching toward bankruptcy.
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Sprint and Nextel agreed to a $36 billion deal in 2005 and then shut down Nextel soon after, due to cultural differences — Sprint was bureaucratic; Nextel was entrepreneurial.
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In 1998, Daimler-Benz bought Chrysler for $36 billion. In 2007, Daimler-Benz paid $650 million to Cerberus Capital Management to sever its ties with Chrysler.
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In 2011, Hewlett-Packard paid $11.1 billion for UK software firm Autonomy. In 2012, HP wrote down the Autonomy purchase as a nearly $9 billion loss, sending HP’s stock into a tailspin.
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In September of 2013, Microsoft bought Nokia’s mobile business for over $7 billion. In 2015, the company was forced to write down the acquisition of Nokia’s mobile and services businesses for $7.6 billion.
Future Wealth’s View
Our view is that, in most cases, Mega Mergers are simply a way for executives to buy their way out of trouble. In many cases – cultural differences (Sprint Nextel), skeletons in the closet (HP Autonomy), big personalities (AOL Time Warner), financing (KMart Sears) and other factors such as politics and regulations (Daimler Chrysler), come in the way of accomplishing any kind of synergies between two large companies. Ultimately, shareholders and investors get the short shrift.