Extra!
Will megamergers pay off for investors?
Investment bankers work feverishly to put together megamergers, but most on Wall Street shun the deals. Statistics show most don't work over the long term. Will GE and Palm have more success?
By James B. Stewart
Yesterday, AOL Time Warner (AOL, news, msgs) officially became Time Warner, a fitting milestone in what will surely rank as one of the worst corporate deals in history, at least for the old Time Warner shareholders. Whether the business combination made any sense at any price remains to be seen, but so far Time Warner's attempts to wring any kind of synergy out of the merger have been a conspicuous failure.
Even though investment bankers work feverishly to put together these megadeals, most of their investor colleagues on Wall Street shun them. Statistics show that most mergers don't work over the long term. And in the short term, they tend to dilute earnings and add massive amounts of debt to the acquirer's balance sheet. For that reason, the share prices of acquiring companies generally drop on news of a deal.
Don't dismiss all the big deals
But while the selling is often appropriate, it also tends to be indiscriminate, which can create buying opportunities. So before you tar all big mergers with the AOL brush, let me commend two recent combinations that I predict will eventually pay off for investors.
Last week, General Electric (GE, news, msgs) announced that it had signed a definitive agreement to acquire the entertainment assets of Vivendi Universal (V, news, msgs), including the Universal studio and theme parks, and cable channels. It will combine them with its No. 1-ranked NBC network and cable channels and may eventually spin off the resulting diversified media entity as an independent company. And GE gains an 80% stake in these impressive assets at a remarkable price: just $3.8 billion in cash, and the remainder of the approximately $14 billion transaction in newly issued GE stock. (Editor's note: GE is the parent of CNBC, which, in partnership with MSN, publishes this site.)
Wall Street has inexplicably taken a ho-hum attitude about this, but in my view, this was a once-in-a-lifetime opportunity for GE to transform NBC from the last of the stand-alone networks into a diversified media company. Its rivals -- CBS, ABC and Fox -- are already part of large media conglomerates (Viacom (VIA.B, news, msgs), Disney (DIS, news, msgs) and News Corp. (NWS, news, msgs), respectively), and they have proved the existence of the synergies that so many other industries dream about. To cite just one prominent example, Universal television produces NBC's hugely successful "Law and Order" series. Once series like "Law and Order" go into syndication, they become hugely profitable for the studio that produces them -- and those profits will now stay in the GE fold.
Widespread skepticism about GE
So how have GE shares fared? After closing above $32 in mid-September, they dropped about 10%, to near $29 this week. In part this is because Wall Street didn't like GE's third-quarter earnings, which met expectations but were accompanied by a cautious outlook for the full year. Apart from Universal, GE has been on an acquisition spree, last week spending $11 billion for two European medical-equipment companies. In a broader sense, it's because GE has lost the luster it had under Jack Welch. Even though GE emerged from all the corporate scandals virtually unscathed, and has made numerous reforms to address investor concerns, it still faces widespread, and to my mind, unjustified, skepticism. I think GE will benefit from the economic recovery, especially as the airline industry recovers. And the NBC-Vivendi Universal deal only adds to the allure.
As I've said before in recommending GE in this column, I own GE shares, and would consider adding to my position the next time a buying opportunity presents itself.
Another merger I like is the proposed Palm Inc. (PALM, news, msgs) acquisition of Handspring (HAND, news, msgs). This is an old-fashioned horizontal merger of a direct competitor, and in the days before the tech bust, it probably would have been blocked on antitrust grounds. But today, the struggling Palm, whose wildly successful initial public offering made it the poster child of the tech bubble, gets scant attention from either Wall Street or Washington. In the wake of the merger announcement, not one analyst recommended the stock with a Strong Buy recommendation, and most don't even cover it.
Raves about Palm's new products
With expectations for Palm so low, it won't take much to give this stock a boost. Here's the admittedly personal reason why I think this merger will work: Prominent Wall Street Journal technology columnist Walt Mossberg, an old colleague of mine, recently raved about the new Handspring Trio, which has an organizer that runs on Palm software, a cell phone and a wireless Internet and e-mail provider. This is an all-in-one device that actually works (according to Mossberg), something I've been waiting for since my pockets simply will not accommodate more than one of these things. Apparently there are plenty of people like me. When I went online to see about ordering one, I saw that demand was so heavy the company was experiencing delays in shipment.
Palm shares aren't the bargain they once were, having nearly doubled, to $24, since the Handspring merger was announced in June. (The shareholder vote is scheduled for the end of the month.) But Palm is still cheap, considering it endured a 10-for-1 reverse stock split after sinking to just pennies a share (a maneuver that left me with an all-too-modest position in the stock). So Palm, too, will be on my shopping list when a buying opportunity arises.
And when might that be? I admit this latest rally has been more persistent than I would have predicted, if I made predictions -- which I don't, as I explained last week. But who's complaining? I'm enjoying the rally. This is a time to be patient, collect ideas and wait for a buying opportunity. They always come eventually. Meanwhile, the Nasdaq is nearing a 75% gain from its low last October, which means another selling opportunity is on the horizon. I'll consider my options in next week's column.
For market commentary every day, visit SmartMoneySelect.com.
|
