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.
 


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5 Comments so far

  1. michael Bonderer on May 2, 2010 4:49 pm

    Henry Singleton was the exception.

  2. Tosin on May 2, 2010 6:59 pm

    Hey Victor, I just finished reading "Education of a Speculator" and decided to research more about you. It's really hard to win and lose it all and I must commend that you're a strong man. I'm a currency trader from London. I just discovered your website today and will stop by from time to time.

  3. vic on May 2, 2010 9:11 pm

    I talk a much better game than I play. vic

  4. Gary Rogan on May 3, 2010 12:23 am

    Just about anybody who just keeps acquiring new businesses and leaving them alone is just piling up failing enterprises and giving them less motivation to survive than before. Or non-failing enterprises where the owners just get too old to run it and still giving them less motivation. I once sold a stock in a company that kept buying up dental labs one after another when it hit me that they were doomed due to this very logic, especially once I figured out that there were really no synergies of any kind. And yet the crazy sage oracle didn't do too badly with the ones he left alone. Actually I don't know. He is such a tantalizing mystery, I can't figure out what the hell he is all about and what's truth and what's fiction. Watching his statements and his behavior is confusing business. It's hard to even know if all these CEOs that talk like his lapdogs really mean it, they just sound so damn sincere. And what's with being a character witness for Lloyd and then playing the ukulele? And can he just shut up about his secretary's tax rates? Now everyone will be paying more because the woman didn't have a good tax accountant.

  5. douglas roberts dimick on May 3, 2010 9:56 pm

    Cheap Money No More or of a Different Spigot

    TMX noticed me up… Commentary: The Winds of Change Blow on Private Offerings By Stephen J Nelson… The financial services reform bill, called “Restoring American Financial Stability Act of 2010,” would make pump-and-dump schemes a lot harder to pull off.

    Ironic, how all of DC is staving off the post-1929-second-coming crash by borrowing the markets out of post-crisis depression with continued, unprecedented debt expansion.

    What M&A other than that so stratospheric (e.g., Charles River’s $1.6b of Wuxi Pharm) among cross-borders?

    dr

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