May

2

the two blades of the scissors come togetherOne of the hallmarks of a terrible decline in the fortunes of a company besides skyscrapers and hubris is an acquisition binge. A certain non-bank company with extensive financial interests and a tall chief headquartered near me that has made thousands of acquisitions and does not talk to analysts except when they are in trouble comes to mind as well. Much too often the acquirer sells out when it sees the handwriting on the wall. Many of the big banks bought with abandon before their own fight with the death spiral.

The other side:

One has seen this happen often times when I was in the finder business with buyers trying to cover up their own lapses by buying to boost lapses in their own business. Often the two blades of the scissors come together with the buyer trying to pull the wool over the seller and the seller over the buyer. The net result to me has always been that companies that make it a principal part of the business to buy companies seem to me to have inordinately poor performance. I have seen innumerable conglomerates in my day go from great to dismal. The companies that say they are in the business of acquiring and use the word "tuck in " acquisitions or some such are all prime candidates for a fall in my experience. Of course every one of these acquirers says that their mantra is "we leave the acquired company alone to run its own business. Look at how small our headquarters is."

All these thoughts come together when I saw a quote from a sagacious business man in the Midwest saying "I am ready to spend 11 figures on Monday if I get a call from the right acquirer." How has he held back the Canutian tides? All these thoughts must be quantified.

George Parkanyi writes:

I'm not sure how counting as such would work here. Perhaps you could do an analysis of company performance as a function of accounting goodwill. Beyond that, I think it ultimately comes down to human nature. People don't easily identify with being part of a big monolithic entity. They understand that their individual impact is heavily diluted. My experience has been that the best teams are small, tight, and focused, and conglomerates by definition are not tight or focused. The so-called "synergy" that acquisitions are supposed to create is usually just a euphemism for "layoffs", particularly to the working ranks. Muy anxiety. And/or sometimes the entire heads of acquired companies are cut off and new ones screwed on, muddying the career paths of those just experienced managers just below. Large organizations in general also feature a wider communication gap and disconnect between senior management and front lines. To me this is a solid prescription for poor morale, and subsequent mediocre to poor productivity.

Another type of company to watch for are the ones that are constantly re-organizing. Re-organizations more often than not, in my experience anyway, tell me that a company is not tackling its problems head-on, but rather just papering over previous poor decisions by shuffling people around.
 

Oct

23

See chart showing the relation between 30 yr swap spreads and 5 yr swap spread going back to 1994.

The current situation seems incredibly absurd to me– can any readers offer some insight into the economic/financial implications of this? It seems to me that the 30-yr swap spread is utterly out of whack (the 5-yr swap spread is also pretty darn low considering the distress in the banking sector; see this for more on why I think that. In fact, the 30-yr swap spread recently turned negative! (it's now hovering above zero). Consider for a moment what a negative 30-yr swap spread implies. For one, it is saying that the full faith and credit of the US Treasury isn't as good as an unsecured obligation of some shaky banks. But going beyond that, suppose the 30yr swap spread remains near zero. That would means that, if I had a $1b floating rate loan at say, 50 over libor, someone would be willing to lock me into a fixed rate for 30 years, and the rate I could lock it in at is the yield on the 30 yr treasury bond. Now, as we all know, treasuries are pretty expensive at the moment — flight to quality and all that. This statement is of course more applicable to short maturity Treasuries, but it is still the same underlying credit for the 30 yr. Now, I don't know about you guys, but with the way the fed has been printing money lately (see Federal Reserve release, +$245b in a week, and it's much worse, because as you can see, in that last week they sold a bunch of treasuries and replaced them with… crappy assets from banks), I can easily see Libor getting up to very high single digits over the next 10 years.

So what's going on here? What has caused this dislocation? Let's see what the fixed income mavens have to say about this.

Convergence trade anyone? Would be easy to put on — just pay fixed on a 30 yr interest rate swap, and then receive fixed on a 5 yr swap. You could lever it up pretty ridiculously too, as long as you had some cash put aside so you could stay in the game if this madness got even worse.

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