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Beware Monday Morning Merger Talk

Marek Fuchs

You want me to tell you why I don't like Mondays? Monday morning merger talk. It's the oldest trick in the book, one on the lips as a matter of concern and controversy among the top business media editors and writers The Business Press Maven berated a few weeks ago.

The funny thing is that this could have been a topic of concern decades ago, when I was busy chewing plastic toys. Nothing has changed. Nothing will. So, as a savvy investor, you must be aware of how things work and why we should all hate Mondays. Or, at least, beware of them.

Leaving the Kids in the Surf

An investment banker or corporate official who wants to put a company up for sale often leaves the kids fending for themselves in the undertow on Sunday afternoon. That's because Sunday afternoon is the best time to contact reporters looking to fill Monday morning space, which is not always easy.

Even better, no one is around over the weekend -- which means that a leaked story about a company being put up for sale can't be shot down by analysts and traders who say that such a deal is unlikely.

To put a company in play, a banker or CEO will leave the kids in the surf. To be quoted, especially in a negative vein, an analyst generally won't. On any given Monday you'll see a lot of merger talk, with very few sources and even less doubt haunting the articles.

Any random sampling can start with an article by any one of the New York Post writers who brought us the thinly sourced story about Microsoft MSFT taking over Yahoo! YHOO, which lost a lot of investors' money last month.

Today, we have more thin, outdated-sounding talk about Bally Total Fitness BFTH, the troubled company whose stock tanked horribly on Friday.

With the company headed to bankruptcy court, they were also lucky to be headed into a weekend. Then, presto! An exclusive! With, of course, no dissenting voices.

"No Dumbbells" is the catchy name of this particular Monday morning gem with the sub-headline of: "Private-equity firms weighing bid for Bally." The lede says: "Potential buyers, including private-equity firms, are starting to circle Bally Total Fitness, even though the feeble company is heading into bankruptcy court in about two months, according to people familiar with the company."

People familiar with the company, huh? Like investment bankers looking to pawn the thing off on a dumbbell with a pulse? The next two sentences say as much and really back off the premise that anything real, new and definitive is actually afoot.

While no formal buyout proposals (ah-hah) have been made to Bally's board of directors, sources said private-equity firms, including J.H. Whitney & Co. and Texas Pacific Group, have reached out to investment bankers (more likely, investment banks reached out to private buyout firms) and others to explore a possible buyout or restructuring (big difference) of the nation's largest health club chain before it goes into bankruptcy.

TPG and other deep-pocketed firms, including Leonard Green & Partners and Kohlberg Kravis Roberts & Co., have all reviewed a takeover of Bally in the last two years (old news, reported to support possible non-news. Plus, all firms like Leonard Green and KKR "review" nearly all companies. A review -- like companies "talking" about a merger -- means little to nothing, especially if it happened two years ago. But on a Monday...)

By the way, no one is quoted saying that a private equity firm would have to have their head examined to buy Bally at any price. Responsible analysts and bankers, remember, are watching the kids. And I haven't the faintest idea if this is true in any particular case, but the editors and writers I beat up on were themselves very concerned about Monday morning "exclusives" being given as part of a quid pro quo for little or no dissenting opinion.

Everybody's Doing It

Low-lighting the New York Post on this Monday morning nonsense is no specific knock on Rupert Murdoch, by the way. The Wall Street Journal is famous for Monday morning merger talk stories. Look at this Cadence Design Systems CDNS story from this morning's New York Times.

"Specialized Software Maker Is Said to Be in Buyout Talks."

Notice the passive voice..."is said to." That's always a tip-off that those looking to peddle the thing are behind the talk. Notice, too, how the lede and next thought or two -- complete with a tactically placed back-off of the whole premise -- are almost identical to the Post article:

"Cadence Design Systems, one of the largest makers of the software used to design computer chips, is in talks with at least two buyout firms about a possible sale of the company, two people close to the matter said yesterday.

"The company has held talks with Kohlberg Kravis Roberts and the Blackstone Group, and other suitors may emerge, those people said. But they warned that a deal may not happen because of the complicated risks in the company's business. Other private equity firms took a look at Cadence but passed."

Remarkable. Now you know why I don't like Mondays.

Media on Media

The interesting thing about this Monday, however, is that Rupert Murdoch will be meeting with the Bancroft family. This deal is interesting on a number of different fronts -- from its effects on the future of business media to the possibility that this will be the pivotal merger deal that, in collapsing, will spook the markets.

I've lined up three articles for you, one from Barron's, one from Forbes and one from TheStreet.com. One says the deal might not go through, that the Bancrofts might round up another bidder.

I disagree with this line of thought. Dow Jones DJ is simply not a viable long-term business at this point, so the only buyer would have to be doing it out of vanity, harnessed to the ability to leverage Dow Jones and use it as a loss leader.

I don't think any of these other companies can -- and I think our own TheStreet.com, in mentioning Warren Buffet's historic love affair with newspapers, neglects the Oracle of Omaha's more recent history, which includes lines about how every time he goes to funeral, he knows newspapers have lost another reader that won't be replaced.

The Stock of the Year

When I picked J Crew as my stock of the year, part of my stated reasoning was Drexler's comparatively straight way with words, a rare quality indeed, so if you have the time and inclination, you might want to listen to the conference call.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Bally Total Fitness to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.