TO & Guidant & JNJ

On Sunday, I watched the Redskins beat the Eagles 17-10. The Eagles didn’t have their star receiver Terrell Owens, and I don’t think his presence would have made a difference. I don’t see how Owens can continue to a part of the Eagles anymore. In fact, I doubt he’ll play for an NFL team ever again. Seriously, who wants that headache?
“TO” is an immature, selfish, greedy brat. That’s not what you want from a football player. A hedge fund manager? Sure. But not a football player. He poisons whatever touches. Frankly, I think the Eagles deserve some blame simply for tolerating his antics for far too long.
You’re probably wondering where I’m going with this. After giving it some thought, I think the TO story has its parallel with some corporate mergers, or would-be mergers. As I’ve said before, I hate mega-deal mergers. They rarely work out. Executives love to declare them. They get to use business school words like “synergy” and “cross-promotion.” The stock market usually rewards the stocks, at first. But after awhile, the big deal is seen to be one big headache. Mega-mergers are the TO’s of Wall Street.
The problem is that these ”synergies” never work out. I’ll give you a great example. Fifth Third Bank (FITB) used to be an all-pro bank. (That name? The Fifth National Bank merged with the Third National. So they called it, Fifth Third. Yep, and it’s still better than Verizon.) This was a stock that creamed the market for years. They dominated banking in Ohio. From 1975 to 2002, the stock went up about 250-fold. Then they had to blow it all away. Fifth Third announced its mega-merger with Old Kent, a Michigan bank.
Suddenly, there were accounting problems. Followed by regulatory issues. Followed by a loss of market share. Now the share price has been cut in half, despite a rising market.
That’s how dangerous a bad merger is. A bank goes up 250-fold, and then falls in half. Now the word on the Street is that Fifth Third would make a great acquisition target. I mean, it’s so cheap it can’t possibly go any lower. Right? Plus, there’s synergy. It can’t miss! The latest is the Wells Fargo (WFC), or maybe US Bancorp (USB) are interested. Do these people ever learn?
We also have the story of Time Warner (TWX) desperately trying to ditch AOL. I rank this as the worst merger since the Hitler-Stalin Pact. This is The Onion from five years ago:

In the largest merger of imaginary assets in corporate history, Internet giant America Online last week acquired media megacorp Time-Warner for an unprecedented $161 billion in pretend money. “This merger will revolutionize the way invisible amounts of non-existent cash are transferred,” said Steve Case of AOL, a company whose actual revenues are a tiny fraction of its make-believe valuation. In an effort to keep pace with AOL, website blairwitchproject.com is expected to acquire General Motors sometime later this week.

The merger was going to revolutionize media. Cross-promotion! Leverage assets! Synergy! Then the bubble burst, and Time Warner was left carrying a dog. Is anyone really surprised? Microsoft (MSFT) and Google (GOOG) are now ready to square off in a fight for AOL. Actually, I’m not expecting much of a fight. I think Microsoft will win out simply because they need it more.
I don’t have anything against small mergers, or “fold ins.” Large companies are always buying up smaller companies. The problem is the “mega-merger” that’s based on concept not real business.
Look at what happened to Citigroup (C). They had the idea to make a “financial supermarket.” Hey, let’s take a mediocre bank, a mediocre insurance company, a mediocre investment bank and a mediocre retail brokerage, and smash them all together. It will make one great super-huge company! Actually, you get one gigantic mediocre mess. Notice how Lehman Brothers’ (LEH) stock keeps soaring, but Citigroup’s doesn’t. And now it’s Citi that’s selling off its insurance assets. My bet is that Citi will spin off Smith Barney and/or Salomon Brothers before the end of 2006.
Here’s a hint: You always know a merger isn’t going well when the name gets changed back. The “AOL” just disappeared from AOL Time Warner like some out-of-favor Kremlin official. Or Morgan Stanley/Dean Witter is now Morgan Stanley (MWD) again? Morgan Stanley was the epitome of the Wall Street establishment. It was originally cut loose from J.P. Morgan back in the 1930’s when banks and brokers had to part ways.
Dean Witter was the scruffy young upstart that brought Wall Street to the middle class. But together…they had Synergy!! This merger always reminded me of what Bette Davis said of Fred Astaire and Ginger Rogers: “He give her class, and she gave him sex.” How much longer does the “Chase” have in JPMorgan Chase (JPM)? Or Mobil in ExxonMobil (XOM)? Those aren’t spelling mistakes, by the way. Squished together names usually signify squished together companies. CEOs even try to synergize the alphabet. It’s what I like to call a “dumbassidea.”
Now we have to watch the sorry spectacle of Guidant (GDT) suing Johnson & Johnson (JNJ), demanding to be bought out! What are they thinking? Guidant, they’re just not that into you. Move on! Guidant did everything it could to screw up the merger, and now they’re angry that J&J has cold feet. There’s so much bad blood, how do they expect the merger to work out? Instead of $76 a share, Guidant now just wants $69. Please.
Both companies should forget about it, and pretend this whole episode never happened. It will be better for both. J&J, Guidant, TO and the Eagles never should have gotten together in the first place.

Posted by on November 8th, 2005 at 4:04 pm


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