Takeovers and Acquisitions: Who's Responsible?
Stein, Benjamin J.
Benjamin J. Stein TAKEOVERS AND ACQUISITIONS: WHO'S RESPONSIBLE? You first must ask: Who stands to profit? Could it be the middlemen? F ederated, Koppers, Cal-Mat, Roper, Firestone, Resorts...
...If its capitalization doubles in price, is it still cheaper than building a new company...
...These people have to reconcile their huge need for income to feed their infrastructures and their own families in Southampton...
...One need only think of Apple, Compaq, Adidas, Nike, Gatorade, Haagen-Dazs, or a hundred others to realize that in fact good will can be generated rapidly with a good product and good advertising...
...Right on, Mr...
...Ann Landers, Daily News, New York "How have we done so well for so long without it...
...It would be incomparably cheaper in transaction costs, and far easier in terms of execution of the trades, simply to buy contracts in foreign currencies in the first place...
...They have seen some financings that were on the floor go up onto the shelf...
...As an entire explanation, or even a large part of an explanation, the cheapness of the dollar when applied to buying a stream of dollar earnings is at best incomplete...
...How else explain the former China lobby or the present pro-GlassSteagall lobby...
...In particular, the financial markets are made up of people who like to make money...
...That "secular stagnation" theory was popular during the worst of the Great Depression...
...It is hard to believe that buying an entire large company for hundreds of millions, or even billions (in the Firestone case), of dollars just to bet on currency movements makes much sense...
...Milton Friedman, the Nobel Prizewinning economist-seer, has long postulated that the maximum of effort and success accrues to efforts in society that are waged by the smallest number of people—because the rewards per person are so huge...
...But as my pals the investment bankers tell me, that Adam Smith-type of analysis would be correct except for a big but: yes, anyone can build the factories and the showrooms...
...But what we often see in today's rash of takeovers is public companies buying other public companies...
...Now, to be sure, all of these are interesting explanations...
...What is the equivalent of China White for an investment banker...
...Newsday A collection of audacious wit and irrepressible opinions, the pithy epigrams apply to all of life's situations...
...Personal gain by the few...
...The study found that in general, the shareholders of target firms tend to be winners in that their stock price goes up after an acquisition and their economic utility is increased...
...T n some cases, the defenders of the .1 theory that there is added value to buying extant businesses say that, yes, at a certain price, we could build up a business from scratch...
...The Sayings of Chairman Malcolm "Gems" said USA Weekend...
...Its crown jewels simply cannot be duplicated, so goes the reasoning, and that tells why a Federated, when sold as a going concern, can command almost triple its twelve-month low and almost double its "normalized" price as a stock...
...If one combines the Friedman theory about the inverse ratio of power to numbers, and the direct ratio of gain per person to the success of the effort, with the Buchanan theory of public choice—and then transfer them to the corporate sector—you might come close to generating a workable theory about the present wave of mergers and acquisitions...
...There is enormous, overwhelming self-interest on the part of the people who sell and finance these deals...
...The weight of history suggests that self-interest, especially on Wall Street, is worth any number of theories about foreign currencies, the impossibility of building new good will, the relative "cheapness" of existing assets—even when the bidding for them doubles their price...
...In particular, the takeover wave and the explanations around it raise questions about how well financial markets value investment opportunities and equilibrate forms of investment—and just what the market is doing in valuation on an ongoing basis anyway...
...But then these days what doesn't fly in the face of that notion, at least on a company by company basis, if not on the basis of macro studies...
...But, these people say, the problem is that the price of buying an existing company with its already existing good will is so much lower than that of buying a new company and building it up that we must go with the already existing company...
...What they said about the first printing...
...Princeton Packet State Zip Forbes 60 Fifth Avenue New York, NY 10011 Join the party, get...
...My check for $8.95 plus 95( for shipping and handling enclosed...
...istration are numbered, and that its admittedly null enforcement of antitrust laws may be replaced by sterner measures from the next administration, and that therefore someone better get while the getting is good...
...And, yes, the basic idea that buying already extant assets is worth far morethan building from scratch is both self-contradictory and contradicted by the evidence...
...At the same time, they have become addicted to a truly huge flow of income...
...Why was the market so completely unable to see what the "real" price of the stock should have been...
...This little book is witty, wise, serene, sometimes sober and at other times tipsy...
...sin particular, that the acquisition of corporations with established good will is almost indispensable, since it is nearly impossible to create a new reservoir of good will for a new product which will be even roughly comparable with the good will which exists around an already extant successful product...
...These would include Bridgestone and Firestone, Beazer and Koppers, Brierley and Cal-Mat, and possibly Campeau and Federated (although the price of the Canadian dollar moves fairly closely with the U.S...
...Forbes has covered a lot of ground and so do his sayings: Gems...
...Better still...
...Where else can a few weeks and months of meetings become leveraged into percentage points of major industrial companies...
...It was proved to be drastically incorrect then...
...In addition, the theory that there is some very large special premium attached to buying extant businesses instead of starting new ones implies that the business system has a tragic static quality to it...
...Or, to take an even more basic look at the problem, how can it be that a company will be selling at 26, as Koppers was a few months ago, and then have its price go to 55, and still be a bargain...
...In essence, that theory simply said that in matters of public policy, you can foretell the outcome by looking at the self-interest of the public politicians involved, not at the interests of constituents or of the public weal...
...Over 1,000 of the Chairman's Sayings have now been published in a set of two slim green and gold volumes to the delight of readers and reviewers...
...that the days of the Reagan AdminBenjamin J. Stein is a writer, producer, and economist living in Hollywood, California...
...In an economy which has been in the longest peacetime boom in history now since about 1981, the idea that there is no room for starting new businessesshould be considered highly suspect indeed...
...THE AMERICAN SPECTATOR SEPTEMBER 1988 19...
...Ideal fare for lovers of the zip read...
...This argument defies several fundamental notions about what financial markets do—and about what growing economies do...
...It seems to me, just as a humble hypothesis, that the explanation that these takeovers represent an irresistible bargain because the dollar is so low relative to the pound or the yen is highly suspect...
...What self-respecting investment banker of 1988 would even hint that there should be slow steady sales of bonds with a payoff to the investment banker of one-quarter percent when he could sell the whole billion dollar thing and get two percent off the top...
...Where do huge injections of money come from...
...That is to say, any large benefit derived from the low dollar will be exactly offset by the same low dollar/yen ratio when the earnings from Firestone are brought back to Japan...
...Where is the engine that powers buying and selling whole corporations instead of building them up year by year...
...And finally, the explanations seem to me to miss the most fundamental point about why the deals take place at all: which has nothing to do with any of the stated explanations and everything to do with individual human ambition and need...
...It is a terrific book, with a thousand things that you'll want to repeat and memorize...
...USA Weekend The Malcolm Forbes sayings in this latest collection are clearly the fruit of deep contemplation...
...Indeed, free market theory says that such a situation is impossible in all but the shortest run...
...Barry Gray, Radio Station WMCA, New York "It is unlikely, though possible, that students at the Wharton and Harvard Business Schools will wander through the quad with this little green book open, memorizing Forbes capitalistic pearls...
...Who in his right mind would ever recommend to a corporate client anything but buying and selling whole corporations...
...This study followed a large number of takeover situations involving public companies on both ends in the last five years...
...Certainly, we have seen over and over again that when individuals take a company private, they are able to squeeze vastly more money out of it than the public stockholders ever saw...
...Indeed, the anecdotal evidence once again weighs in heavily in favor of skepticism about the value to acquiring shareholders of major acquisitions of public companies...
...If that process did not apply, people would never start new companies or would never do anything but acquire extant companies—and again, even that process would presumably set in motion some kind of equalization of price...
...Where else but M & A? Where else are the deals so huge that even getting a few points off the top is tens of millions of dollars...
...Some suggest that the purchase of dollar-denominated assets by foreigners in fact takes that very fact into account, and is a bet that the dollar will appreciate in relation to the yen or the pound—and that therefore the purchaser would have gotten a great steal on the buy side and then on the dividend side...
...When they are repatriated to Tokyo, the owners of those dollars will take a haircut exactly equal to the gain they enjoyed on buying the company in the first place...
...It is, I think, a basic piece of the free market catechism that the market will set a price on a factory which roughly equilibrates its cost with the cost of building a new similar factory...
...If that grim theory were true, a large part of advertising would simply be valueless...
...The Weidenbaum and Vogt data showed that "on average, acquiring firm shareholders are not as fortunate [as target firm shareholders...
...You get assorted amusements, even though it's clear there's not much at the center...
...But a far more troublesome expla- nation of the mergers and acquisitions landslide has to do with the notion that buying already extant assets is a far cheaper way to acquire them than building them up from scratch...
...Their stock values rarely rose in any way that could be related to the takeover...
...If a company is still a bargain at 55, how could the market have been so grossly incorrect in valuing it before the takeover came along...
...It is difficult to think of many major acquisitions by public companies of public companies that have enriched shareholders of the acquiring firm...
...The immediate resolution is to generate more income some other way...
...James Buchanan won his Nobel Prize for something called the "theory of public choice...
...For one major thing, yes, the dollar is at a historic low (or near it) relative to the Japanese currency...
...Chairman...
...Guess what...
...An acquirer will start to buy a company at price X, which preReading Malcolm Forbes' latest is a lot like having a dinner of fortune cookies...
...How else explain why a few lobbyists can displace millions of voters...
...Because phenomena in economic life are often believed to have some rational cause, observers have sought and found a variety of supposed causes of the tidal mania for acquisitions...
...There is no wealth of real world information that says that acquiring large extant companies instead of building them from scratch makes economic sense for the acquirers...
...I just read your book, and it was delicious...
...It just is not true that a company needs to be a century old to have a consumer name worth owning...
...Or, once the bidding begins, does that calculation about building from scratch somehow fly out the window...
...In fact, I suggest that you can learn more about the causes of the recent wave of mergers and acquisitions by studying a market made up of people...
...The problem with that is twofold: if the purchases do not make economic sense anyway, the lack of restraint by the Department of Justice should not encourage buyers to make a bad deal...
...But this explanation, like the foreign currency explanation, seems to me to leave out certain facts from that world we call real life...
...The final argument that appears supporting the wave of mergers and acquisitions is that the buyers better get while the getting is good...
...The problem with that line of analysis is that it assumes that the Japanese—or British—purchasers are really just speculating on the future price movements of currencies...
...Is the already extant company still a great bargain compared with starting a new company...
...Yes, the explanations of why foreigners are buying leave a great deal to be desired...
...Now, this leaves something of a muddle in the middle of a puddle, but there is a way out...
...AS THE AMERICAN SPECTATOR SEPTEMBER 1988 17 sumably is a price cheaper than the price of buying new assets...
...Once the self-interest of the investment bankers is clearly defined, it is easily within their power to make up theories about why it really is not just the investment bankers' self-interest that is at work, but larger, more impersonal economic forces, market forces, forces that do not run off the gain of the middleman...
...Many of those people and the firms at which they work have seen drastic declines in trading income...
...Presumably, although there are a great many other variables, something of the same process applies to entire 16 THE AMERICAN SPECTATOR SEPTEMBER 1988 companies...
...What was the market doing with Federated and Cal-Mat and Koppers and Firestone all of those years and months...
...Be provoked and amused, fill out and return the coupon today...
...Send to: Name (please print) Address City Please add sales tax for New York State and other states where applicable...
...You can have them all at the bargain price of $18, slipcase and shipping included...
...That self-interest lies entirely in trying to sell whole companies rather than selling a lousy 100 million bonds here or there...
...onsider first the foreign acquisitions and attempted acquisitions...
...Mergers and acquisitions...
...Or, to look at it another way, if it is still a bargain at 55, how could the market have been so grossly incorrect in valuing it before the takeover came along...
...In fact, we've seen that phenomenon at work more or less constantly every day this year...
...Send me the set of two volumes in matching green slipcase for only $18 (shipping and handling included...
...On the other hand maybe they should...
...Again, this may be true, but if it is, it mocks the notion that the markets are efficiently valuing corporations on an ongoing basis and comparing them with alternative investment opportunities...
...Irrepressible", said The Princeton Packet...
...Check enclosed...
...John Weisman, Los Angeles Times P L "Right On, Mr...
...This "explains" the fact that a Federated, with its magnificent empire of stores from Bloomingdale's to Ralph's, will, as an entire going concern, sell for so very much more than it did as a stock...
...For one thing, unless I somehow missed something, aren't markets supposed to equilibrate the costs of building new assets as compared with buying already existing assets...
...However, the study foundexactly the opposite effects in terms of the stockholders of the acquiring companies...
...Then other bidders enter the field and the price rapidly rises far above the original price...
...Two cents worth times 1,000 is $20...
...The Reagan Administration is on its way out, and the next President may rigorously enforce the antitrust laws, or so the theory goes...
...I am not sure exactly why that should be true, but even if it is true, the question really is, by which calculation is it worth more...
...But, like a great many explanations, they do not really explain anything...
...There is no valid free market economic theory which explains why an acquiring entity should seek a whole extant corporation instead of building one from scratch...
...Publishers Weekly ( ) Send me "The Further Sayings of Chairman Malcolm...
...Would it still be a bargain at 110...
...If those theories don't make sense, the middleman has the wherewithal to generate new ones...
...The earnings from an American acquisition will be largely, if not mostly, in dollars...
...But this cuts both ways...
...They have seen startling gaps in the once solid wall of institutional avarice for equities...
...Indeed, Weidenbaum and Vogt note that, interestingly enough, the managers of acquiring companies tend to "promote the interests of a select group of shareholders to whom they have no obligation, at the same time neglecting those they were hired to serve...
...but always great, terrific, and in all ways, well worth its price...
...Chairman" —Publishers Weekly "A dinner of fortune cookies" —Newsday Chairman Malcolm pens more of his wealth of wisdom...
...In that case, the incredible bargain of American companies does not look like as much of a bargain...
...The notion that the American economy will not support new businesses is similar to the notion that America was in a secular decline that would continue more or less forever, and that everyone had better make the best of it...
...The burden of self-interest on the part of present day Wall Street is in persuading flush purchasers to buy corporations...
...At what level in the bidding contest is it no longer cheaper to buy already existing good will...
...In fact, I would think that the advertising agencies of America would be rising as one in righteous indignation at the mere suggestion that good will could not be created by an intelligent, aggressive advertising campaign...
...Among the more popular of these explanations are the following: 'that corporations which are capitalized in the United States represent a great bargain for foreign investors because of the relatively low price of the dollar compared with other currencies ("relative" in this case signifying a comparison with recent times...
...But—and this is a huge but—anyone who can do long division can tell you that it makes tremendous sense for the salesman on commission to sell the whole company...
...But (and this is the big but) there are some brand names so well established that no amount of money can acquire their level of good will among buyers...
...According to various reports, depending on whether you trust W. T. Grimm or the New York Times or someone else, the pace of mergers and acquisitions is 50 percent above last year at this time or 100 percent above last year at this time, or maybe even more than that ahead of last year at this time...
...In fact, there is evidence from a study by Murray Weidenbaum, the former chairman of the President's Council of Economic Advisers, and Stephen Vogt, a senior fellow of the Washington University Center for the Study of American Business, distinctly to the contrary...
...Is it always a bargain if someone is willing to pay for it...
...Investment bankers would presumably reply that a company has one value when you own a hundred shares of its stock and another when you own 100 percent of its stock...
...Isn't that an essential function of the price mechanism as applied to capital...
...In the meantime, as a young investment banker at Drexel Burnham Lambert told me last week, "the deals go on, and that's really what it's all about...
...I ate it...
...that buying an already existing corporation is a cheaper way to acquire earning assets than the building up of these assets from scratch, and that therefore the purchase of already existing corporations is a special bargain compared with capital expenditures to duplicate those resources...
...At best, these shareholders are no worse off, but often they lose during acquisitions" in terms of the total return on their shareholdings of the acquiring firm...
...Clearly (or so it seems to me), if the market did not make that kind of adjustment, there would be an endless amount of money to be made either building new factories or buying and selling old ones—and that process itself would inevitably result in an equalization of prices...
...Clearly, it would be impossible in an efficient market for corporate stock of oldcompanies to sell constantly at a discount relative to the stock of new companies—otherwise the demand for that stock would itself bid up the price of the extant companies until it was in the same league with that of the new companies or the cost of starting them...
...Yes, the wave of takeovers seems to fly in the face of the notion of efficient markets...
...Weidenbaum and Vogt recently published a monograph entitled Takeovers and Stockholdery Winners and Losers...
...As far as I can see, at least for the moment, antitrust is an idea whose time has come—and gone...
...Malcolm Forbes is more than willing to offer his two cents worth on most any subject...
...The stream of earnings, dividends, and retained earnings will be just as heavily discounted as the purchase price of the Firestone (or other) shares were on the way in...
...Second, there is no shrieking from either Vice President Bush or Governor Dukakis about screwing down on antitrust enforcement...
...dollar price...
...That is an entirely different situation, and there is no clear evidence that public stockholders acquiring a company do anywhere near as well as corporate executives taking their own company private...
...More to the point, to the extent that these "explanations" explain anything, they often raise more questions than they answer or explain...
...In fact, many companies which have started recently, or become national recently, have created huge amounts of good will quickly...
...Yes, anyone can design a serviceable product...
...But the reason, I suggest, that all of these theories fail to pay off is that they are theories about markets and currencies and, most of all, that they are theories based upon other theories...
...F ederated, Koppers, Cal-Mat, Roper, Firestone, Resorts International, Media General, these are only some of the nearer hoofbeats from the thundering stampede of takeovers and proposed takeovers that have shaken the ground under corporate America this year...
...The Nashville Banner "I've read it and I recommend it to you unconditionally...
Vol. 21 • September 1988 • No. 9
