This blog post originally appeared on RealMoney Silver on Feb. 23 at 9:02 a.m. EST.
"History does not repeat itself; it rhymes." -- Mark Twain
It is argued by bullish investors and strategists that the increased level of M&A activity highlights a greater appetite for risk assets, improving business confidence, a better lending climate and underscores the large cash hoards at the some of the world's largest companies.
These arguments have merit. But so does the observation that takeovers are often done at or near the top of market and of the general economy.
History also shows that the popularity of companies and industries often peaks (and goes to the extreme) coincident with takeover activity in those areas.
Last week, in an case of impeccable timing after a doubling in the S&P 500 since March 2009,
announced an agreement to be acquired by the
Equally amusing was the previous week's
The Huffington Post
for a large multiple of sales, cash flow and earnings, and this happened after we had already seen an explosion in Internet (again!) and social network valuations -- namely,
funding at a $50 billion capitalization.
If history is a guide, both deals could mark that the end is near, in general, for the rise in the U.S. stock market and, in particular, for the outsized increases in Internet and technology sector valuations
I got to thinking about the large takeovers littered over the last decade, and I suspect the NYSE transaction and the AOL deal will end up as miserably as many other high-profile deals, most of which occurred at the end of a cycle and resulted in large writedowns or unprofitable transactions.
Time Warner/AOL Merger
"This is a historic moment in which new media has truly come of age." -- Steve Case, Chairman of AOL
"The Internet has begun to create unprecedented and instantaneous access to every form of media and to unleash immense possibilities for economic growth, human understanding and creative expression." -- Gerald Levin, Chairman of Time Warner
In early 2000 AOL
for $180 billion in stock and debt in one of the largest media takeovers in history. That transaction, which ultimately resulted in the
, marked the end of the Internet bubble. The
subsequently fell by over 70%.
I was highly critical of this transaction and
Alan Abelson interviewed me on five separate occasions (from 1999 to 2004) in which I gave reasons for my pessimistic views. Soon after the merger, AOL became the largest short sale I ever made, and its shares ultimately declined from the $70s to around $10 several years later. Here is an excerpt of my criticism of the transaction from the first
interview I had on the deal in September 1999:
A few weeks ago, we offered, more or less in passing, some demurs on the outlook for America Online. Comes now Doug Kass, chief cook and bottle washer of a hedge fund called Seabreeze Partners, to weigh in with some reservations of his own. Doug, we should note, has been short the stock since it sold some 50 points higher than its current price of around 96. We should also note that's one of the reasons his portfolio is up 60% or so this year.Among the negatives he cites are: the recent sale of 4 million shares by insiders; the fact that PC manufacturers are offering sharply discounted computers to buyers who sign up for Internet access; slowing in the rate of the company's subscriber growth (in the quarter ended June 30, such growth in the U.S. failed to exceed expectations for the first time in years, and such growth abroad was decidedly nothing to write home about); and increasing evidence of price competition.This last -- gathering price pressures -- Doug views as especially significant. For it was America Online's ability to boost prices back in April 1998 that in no small measure provided the impetus for the stock's remarkable sevenfold appreciation over the next 12 months.Pure and simple, America Online has lost the power to control the price of its product. The cost of Internet usage has begun to decline, and the trend threatens (if you're America Online) or promises (if you're a consumer) to accelerate.Among the rivals likely to cut Internet charges are such formidable ones as American Telephone. What's more, Doug conjectures, there's a very good possibility of Microsoft (MSFT) - Get Report offering free access. Rick Belluzo, its new online chief, has already hinted at his willingness to lose money to gain market share.Doug also sees broadband access as putting fresh pressure on America Online's pricing. High-speed Internet connection, he predicts, will become inexorably more important to Web users, the way e-mail and chat rooms became more important. That will pose a problem for the company because it can't hope to get its customers to shell out $20-$25 more each month, atop the $21.95 they're already paying.The company, in his view, will have no alternative but to roll back the '98 price increase. And that will be especially bad news since it gets something like 75% of its revenue and 20% of its profits from subscribers' access fees.In the fullness of time, Doug expects the price of America Online stock to be cut in half.
"With PaineWebber becoming an integral part of the UBS Group, we are exceptionally well placed in wealth management in the United States as well as the rest of the world. The combination of PaineWebber's client franchise and UBS's product range unlocks immense opportunities for growth. Our two organizations are an excellent strategic fit." -- Marcel Ospel, President and CEO of UBS Group
That same year, in July 2000,
at the beginning of the "
." That deal, too, resulted in a huge writedown and occurred at a market top. See the
chart below which starts at the date of the deal:
JDS Uniphase/SDL Merger
"This combination brings together world-class technical and manufacturing teams that promise to deliver best-in-class products at increased volumes for today's systems while developing solutions for tomorrow." -- Don Scifres, SDL Chairman
In late 2000,
one of its largest competitors,
, for $41 billion, again at the top of the Internet/technology bubble. In late 2001, JDS Uniphase
$44.8 billion of assets. Here is a chart of JDS Uniphase's share performance subsequent to the takeover of SDL:
"This strategic combination with Nymex ... continues both of our companies' traditions of finding innovative ways to create value for our customers and shareholders." -- Terry Duffy, Chairman of CME Group
In mid-2008, just before the collapse of commodities and before the biggest credit crisis since The Great Depression,
, the largest physical commodities futures exchange. See the collapse in the
right after this deal:
As well, CME's shares fell by about 60% in the 12-month period following the March 2008 $10 billion acquisition of Nymex. Here is the chart:
There have been many other huge takeover boners since 2000 at cycle highs -- for example,
Royal Bank of Scotland
and the list goes on and on.
The message for Deutsch Boerse, AOL and all the others?
Approach the euphoria surrounding increased takeover activity with some skepticism, as it often, in the fullness of time, ends up badly.
Doug Kass writes daily for
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At the time of publication, Kass and/or his funds were long Microsoft, although holdings can change at any time.
Doug Kass is the general partner Seabreeze Partners Long/Short LP and Seabreeze Partners Long/Short Offshore LP. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.