OK - I'm not too original today.... But the recent sale of AOL to Verizon made me think of Wall Street, and how it has a nasty habit of creating deals that squander more wealth than those deals create.
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Let's look at the case of AOL. Years ago, it dominated the dial-up internet market. I'm pretty sure most of my readers remember how ubiquitous AOL software CDs were in the 1990's and early 2000's. One couldn't help but get several of these disks every week - and AOL made a lot of money way back when.
At the peak of the market, AOL bought Time Warner. For AOL stockholders, this was a great deal - it gave them real long term value for the stocks they held. However, for Time Warner stockholders, one has to ask - what were these idiots thinking? Yet, no one blamed the advisors at the investment banks (organizations such as Merrill Lynch, Morgan Stanley, et.al.) for selling a questionable bill of goods to Time Warner stockholders - many of whom saw the value of their assets plummet. However, the investment bankers made out like the bandits they were. Eventually, the combined AOL Time Warner got smart - and unloaded AOL. Of course, these same investment bankers made even more money for handling the transaction. Was there any real value generated in either of these two transactions? No. But the investment bankers extracted their share of wealth - and passed it along to their upper managers.
Today, as I started writing this entry, Verizon has just announced that it was buying AOL - in part because of its mobile content. It seems like the same story, but different characters. In this case, AOL brings to the table some technology and some media that Verizon claims to need for its efforts to get people consuming media via cell phones. Does anyone really believe that AOL, with its history, has much to contribute to Verizon?
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Over the years, we've seen many deals orchestrated by Wall Street that made no sense other than to line its coffers. The deals get made, and then a decade or so later, they get unmade. The only deals that ever make sense are those that allow for consolidation in shrinking markets, or for those which allow for expansion in growing markets. Yet, the vast majority of deals do not meet either of these two conditions.
A few years ago, a major Wall Street financial services firm (with a bank charter) ended up merging with one of its major competitors. Upper management claimed that value would be added by "synergy savings". (Read: Layoffs). The two firms merged just before the 2008 financial panic, and made sure that its layoffs were made on time, so that the firm could meet its financial numbers. However, a goodly number of the tasks required to integrate the two firms were left undone - and this created an unwieldy infrastructure which cost the firm more money than if they had missed their numbers for a quarter. (In 2008-2009, no one was hitting their financial targets.) Several years later, the same firm had expenses 120% of that of its peer group - and the only option it had left to make its numbers was layoffs.
Would this organization have been better off had it not merged two competitors? I don't know. But neither organization would have been wasting time trying to integrate two very different firms, and neither organization would have been number one in its market - leaving room for either of them to steal each other's market share, instead of having to perform the harder task of protecting a number one market share. In short, being at the top of the heap limits the organization's room to grow, while being number two, three, or four allows for greater competition, greater innovation, and greater returns to stockholders.
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I'm not saying that all deals are bad. Some deals can be quite good, if performed with the right partner. For example, it was a big mistake for Daimler-Benz to purchase Chrysler. They had no way to integrate corporate cultures, and there was no "synergy" (I hate that word), as Chrysler had nothing to offer Daimler-Benz. Eventually, Chrysler ended up in the hands of Fiat.
Now, Fiat had an interesting history of its own. GM had the option to purchase Fiat, and bailed out - costing the firm a lot of money. Fiat found a way to become financially strong, and saw an opportunity in buying Chrysler that Daimler-Benz didn't have. For Fiat, Chrysler became a springboard into the United States that Daimler-Benz didn't need. Some of Fiat's technology made it into Chrysler cars (e.g. the current Dodge Dart), and some of Chrysler's product line became available to Fiat (e.g. the Jeep). Here was a merger that could work over time.
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Why is this important?
Wall Street will be playing a major role in next year's presidential elections, as it will be throwing money at all the major candidates and expecting a return on its investments. The investment banks will want to keep making value consuming deals, and expect the taxpayers to subsidize their losses.
Can we afford to allow them to get away with it anymore? I doubt it.....
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