Merger Mania -- Good Thing or What?

[Donner]

Got a chance to see the happy talk maven Maria Bartiromo on NBC news over the weekend. She was gushing over the latest rash of merger activity. She sees it -- and pushes it -- as a sign of strength in the economy and by extension the markets. "It's a sign of confidence in the economy by CEO's who are willing to crack open their pocketbooks to blah, blah, blah..."

We are going to see more mergers, large and small, acquisitions, IPO's, secondary offerings, debt refinancing, junk bond issues, and every manner of capital utilization scheme imaginable as we advance in this business cycle. Why? Because businessmen have a lot of confidence in the economy and the prospects of particular businesses? Sorry, Maria, afraid not.

We are witnessing Merger Mania not because business is looking so great down the line but because CAPITAL IS DIRT CHEAP! CFO's and CEO's and every other kind of O's are taking advantage of the fact that scads and scads of capital is lying around unemployed and willing to work for peanuts. So, they are doing what comes natural to businessmen. If you can't grow your market share because of competitive pressures and sluggish worldwide demand then use the willingness of capital providers to work cheap to rub out the competition and grab its market share. The shark bites when the conditions are right and the opportunity presents. And conditions for going after the other guy ain't gonna get any better than they are right now. As the Burl Ives character in Cat on Hot Tin Roof , Big Daddy, said : " Life is a jungle, boy : "it's 'et or git 'et!" He was a pretty miserable character as I recall.

What's this got to do with anything real? Nothing, really, except that it is one more sign of swirling imbalances in the system which are going to have to be wrung out at some not too distant point. The users of capital are going to have to get back in balance with the suppliers of capital. How is that going to happen? Like the period 2000 -- 2003, a lot of excess world-wide capital is going to have to be destroyed. Like any other surplus commodity, capital will be metaphorically left in the fields to rot, burned, held off the market, thrown away, or, as at present, given away to anybody who will take it, cheap. Destroyed. You farmers out there can surely relate to this. Anybody for 1% 30 year home loans? The process of capital destruction had a grizzly start in 2000 - 2003 but today's merger mania and the IPO spectacle that we are going to witness in the remainder of this year is proof positive that the process is nowhere near complete. IMO the damage is done already. It simply remains to be fully "booked" in the most convenient, over priced and vulnerable asset line items.

I don't know about the rest of you, but I don't like thinking about my retirement capital as excess or surplus.

Donner

 

[cute fuzzy bunny]

Its a good thing if you buy into one of the merger related funds that try to make money off the arbitrage. They can offer some nice portfolio diversification if you've run out of ideas. In general they do well in many economic environments.

I owned MERFX for a while. Prior to my buying it, it had never had two sequential losing quarters or a losing year. Guess what it did right after I bought it...four losing quarters and a losing year and I bailed, after which its done very well.

I've thought about re-buying a little snippet. Havent looked at it in about six months though.

 

[unclemick]

Reminds of the 'ancient saying' - 1929 took out the ameteurs, 1937 the pros. Eight years apart.

Asset inflation is a current subject of 'crusty old curmudgeons'.

I don't have a solution - plan to stay balanced index - and soldier on.

 

[Nords]

If you can't grow your market share because of competitive pressures and sluggish worldwide demand then use the willingness of capital providers to work cheap to rub out the competition and grab its market share.

Hey, why not, it worked for Carly Fiorina and Christopher Milliken! Oh, waitaminnit, I'm a few days behind in my Google news alerts...

 

[JOhn Galt]

I never really heard of Carly Fiorina until she was
sacked. I do think her brother Dennis is doing a
pretty good job in his new gig on 'Law and Order'.

JG

 

[cute fuzzy bunny]

I do think her brother Dennis is doing a
pretty good job in his new gig on 'Law and Order'.

"Its okay, we're authorized!"

Best. Line. Ever.

 

[BUM]

Kick it down a notch. The sky is not falling. Donner is blitzen.

BUM

 

[cute fuzzy bunny]

Or as the russian meteorologist told his wife, who was questioning his forecast of showers...

Dammit! Rudolph the Red knows rain, dear!!!

 

[Roger_R]

I don't know much about mergers as related to interest rates and economic doom. A little closer to home, my company announced their recent merger. The CEO walks away with 5 million, the chairman of the board gets 6 million. And two days after the merger they announce a "new" pension plan that's will end up being about half of the old one for the younger work force, and layoffs of redunant jobs with a meager severance.

 

[John Galt]

So Roger_R.............it seems that you find this all quite
unfair. I am curious as to what you propose to correct
this sort of situation.

JG

 

[Roger_R]

John G..... I'm not sure it's unfair at the local level or if there's much I can do to change things. It does make me unhappy. Reduced corporate pensions, overcompensated CEO's and merger lay-offs are the trend for anyone in corporate America. The management rhetoric on this is that they are taking these measures to stay competative in a world economy. I suppose there's a hint of truth to this. The price leader cuts costs doing the very same things and the small fish pretty much have to follow suit. A few million stuffing the pockets of the CEOs helps seal the deal. On a global level this type of thing is widening the gap between the middle class and select privilaged at the top of the feeding chain. This doesn't seem right.

Having read some of the premises in the book "Die Broke", I quit working for my employer, mentally, a couple of years ago. I give them a service that adds some value and is a little interesting and they pay me a decent wage that puts me a day closer to retirement. I work over time on a project and then take some long "lunches" reading the financials. No doubt I am looking forward to the time when I can cut the strings. That may be sooner or a little later, depending on how I can wrestle things, but I will retire early by most standards.

I read an anthopology book recently that proposed that the most peaceful and happy societies have had systems that pass wealth down from the fortunate to the less fortunate. This doesn't have to mean handouts, but a more equitable way of distibuting things. I see us going the opposite way in our politics, our culture and our ways of business. This isn't just a problem with one business, but an overwhelming trend that starts with business leaders and heads of state.

Since you asked, perhaps you have an opinion?

 

[JOhn Galt]

Well, I guess I view it kind of like warfare, i.e. to
the "victors belong the spoils". I feel this way even when I am not the winner and I do not whine about those who did (do?) better than I.

Speaking of "wrestling" that is a good word for how I ERed. I took what I had and "wrestled" it into a form which allowed me to quit.

Regarding 'Die Broke', it was a disappointment to me.
I thought I understood what the book would be about
but I didn't. Couldn't stick with it.

Back to inequities in life and business, I see no way to
level out every possible scenario, nor perceived slights
by this group or that group. I guess it's like "W"
said once in a speech. "It's good to see you all here,
the 'haves' and the 'have mores', otherwise known as my base!"

I prefer "rugged individualism" and will try
to head off the slings and arrows of outraged
members of this forum by saying that I am well aware
of the many advantages I enjoy. However, I expect I would feel
just the same way if I were living in a cardboard box.

JG

 

[Roger_R]

The rugged individual approach certainly has a romantic image attached to it. Right now, corporate profits are somewhat strong and real wages are stagnating. I suppose it would be worse if corporate profits were weak. But stagnating wages are not good for the economy as a whole.

A couple of major reasons why wages are stagnating is the funneling of wages through the labor market and out of the country. Recall the multiplier effect of money introduced into an economy having up to a 5 fold overall increase in economic stimulation. But now this money is going overseas to stimulate another economy. Add to this the funneling of wages upward into the corporate structure. So the forces driving wages and benefits lower may help the books of corporations, we are building a service economy of low paying jobs that will catch up with many of those rugged individuals some day