Corporate dealmakers should heed the lessons of past merger waves … WHY mergers and acquisitions (M&A) come in waves is not fully understood. Companies’ fortunes are affected by the economy’s ebb and flow, but this does not seem enough to explain why merger activity crests and breaks so dramatically. Yet crest and break it does. In America there have been at least five merger waves, in which the number of deals swelled, peaked then tumbled. The first, in the 1920s, ended with the onset of the Great Depression. It was less obvious why the following ones—in the 1960s and then in each decade since 1980—were so strong. Now, say some experts, a powerful sixth wave is forming.
The thing people always talk about first, when they are talking about Net-a-Porter, is the packaging. For a company known for being on the leading edge of online fashion, it is surprisingly anachronistic: The black, beribboned bags that arrive, brimming with tissue paper and the promise of a life-changing ensemble, could just as easily have been delivered by uniformed footman to Eloise’s Plaza as summoned via the internet into the one inhabited by Russian oligarchs. “It’s like getting a present,” the company’s president, Natalie Massenet, likes to say, which sounds whimsical but isn’t. Elaborate packaging is integral to the Net-a-Porter brand. It was central to Massenet’s vision when she started the company in her apartment in 1999, on the premise that good old-fashioned luxury and the utilitarian promise of the internet need not be mutually exclusive, and has remained so even as the company has expanded to become one of the leading players of global e-commerce. ... Back in March, after its parent company, the Swiss luxury retailer Richemont, announced it had struck a deal to merge the site with its rival at a $1.5 billion valuation and in exchange for half of the combined company, Net-a-Porter did its best to make it seem like cause for celebration. ... The Champagne was still fizzing from the last dot-com boom when Massenet launched Net-a-Porter. ... At the time, luxury brands had little interest in selling their wares online. The prevailing sentiment was that designer clothes did not belong in a marketplace known for trafficking primarily in electronics and p~rn. ... It’s a world not unlike a high-end hotel chain, which is the point: “I wanted to make sure that the whole company was unified, like you were opening one door from one office space and then entering another one,” ... The company bends over backward to service Them, providing same-day delivery in Hong Kong, New York, and London, and seasonally in the Hamptons. There are special sales for EIPs (Extremely Important People). Occasional collections are tailored to their needs ... As the CEO of one company who sells merchandise on the site put it to me: “Everyone loves Net-a-Porter. They are great at everything. Except making money.”
Every airline has its horror stories, of course—air travel is full of opportunities for customer disenchantment. But United has proved an industry leader: On all major performance metrics—delays, cancellations, mishandled bags, and bumped passengers—United has, since 2012, been reliably the worst or near worst among its competitors. In 2012, according to the U.S. Department of Transportation, United was responsible for 43 percent of all consumer complaints filed against U.S. airlines. It finished last among North American nondiscount airlines in the 2015 J.D. Power & Associates customer satisfaction survey. ... It’s been five years since United Airlines and Continental Airlines combined to form what was at the time the world’s largest carrier, and the merger hasn’t gone well. In 2012 and early 2014, when American Airlines Group, Delta Air Lines, and Southwest Airlines reported large, and in some cases, record profits, “the new United” lost money. ... Then there was the coffee, an issue that, while hardly central to its business, symbolized United’s inability to get things right. On Nov. 19 the airline announced it was changing the coffee it serves on its planes and in its lounges from a brand called Fresh Brew to the Italian premium roaster Illy. It was welcome news to customers and to the flight crews used to fielding complaints. It was also a tacit admission that the choice of coffee after the merger, a decision that consumed thousands of man-hours, took nearly a year, and involved everyone from Smisek to the airline’s head chef to the flight attendants, hadn’t worked out.
Capital allocation is a senior management team’s most fundamental responsibility. The problem is that many CEOs don’t know how to allocate capital effectively. The objective of capital allocation is to build long-term value per share. ... Capital allocation is always important but is especially pertinent today because return on invested capital is high , growth is modest , and corporate balance sheets in the U.S. have substantial cash. ... Internal financing represented almost 90 percent of the source of total capital for U.S. companies from 1980-2013. ... M&A, capital expenditures, and R&D are the largest uses of capital for operations , and companies now spend more on buybacks than dividends. ... This report discusses each use of capital, shows how to analyze that use, reviews the academic findings, and offers a near-term outlook. ... We provide a framework for assessing a company’s capital allocation skills, which includes examining past behaviors, understanding incentives, and considering the five principles of capital allocation.
Five Principles of Capital Allocation:
1. Zero - based capital allocation
2. Fund strategies, not projects
3. No capital rationing
4. Zero tolerance for bad growth
5. Know the value of assets, and be ready to take action to create value
While the cash offers can seem too big to refuse, they may also appear to come from the corporate equivalent of deep space, so sparse is the information available on the bidder. ... Anbang is a case in point. The group company, which launched a $13.1bn bid for US hotel operator Starwood Hotels this week, quickly following its offer of $6.5bn for Strategic Hotels & Resorts, has never published an audited financial statement. Neither does it divulge the identity of its ultimate owners, give a full list of its executives or explain how its growing roster of foreign subsidiaries fit within 10 business divisions listed on its website. ... Anbang, which is just 12 years old, astounded the Chinese insurance world in 2014 with successive fundraising rounds that expanded registered capital from Rmb12bn ($1.8bn) to Rmb62bn in less than a year, introducing 31 new investors. This propelled it to first place among insurers, outstripping the likes of China Life and the People’s Insurance Co of China, even though they far eclipse it in terms of premiums. ... A broader concern about China Inc’s acquisition spree stems from questions about why it is happening. Is it being driven by strength, or is it a reflection of the waning vigour of heavily indebted corporations in a slowing domestic market? To a significant degree, analysts say, the exodus of Chinese investment capital is in fact a “quest for cash flow”. ... Data from the 1,627 domestically listed companies, or 58 per cent of the total, that have reported their 2015 earnings show a clear deterioration in fortunes.
Hormel’s best-known product is Spam. It’s easy to joke about a company built on meat that comes in a can, but it turns out that Hormel is having the last laugh. ... The growth has been fueled by a flood of new products: everything from peanut-butter snacks to single-serve turkey sticks to a food-service burger made with chicken, quinoa, and, yes, kale. All were developed in Austin—proof that innovation is defined by people, not zip codes. ... But Hormel’s success is also a story of acquisition and the persistent colonization of new food worlds. In the past five years, the old-school meat producer has paid more than $2.3 billion to acquire a portfolio of brands that sell organic food, ethnic food, and health(ier) food. They include Wholly Guacamole, Muscle Milk, Skippy peanut butter, and Applegate Farms. In May it agreed to buy Justin’s, the ultrahip nut-butter company, for $286 million. ... as companies invest in the eating habits of the emerging America—one that is more diverse, more pressed for time, and more concerned about ingredients and the ethics of food production. By that narrative, it’s not that Hormel has a better recipe than its peers. But it may have better cooks.
Katzenberg admits his greatest motivator is, well, winning. An avid gambler, he got kicked out of summer camp at age 15 for playing cards (that was for M&M’s; these days he plays poker for much higher stakes). But DreamWorks wasn’t always a straight flush. The original production company never lived up to the expectations generated by its high-wattage founders: Katzenberg, Spielberg, and music and film mogul David Geffen. DreamWorks Animation, which became independent in 2004, had more success—but never attained the scale to secure its future in an increasingly conglomerate-heavy Hollywood. ... Still, under Katzenberg’s direction, the animation studio, based in Glendale, Calif., was prolific, sometimes profitable—and most important, prescient. In 22 years, including as a division of DreamWorks SKG, it produced 32 films, garnering more than $13.5 billion in worldwide box-office revenue. ... He was early to recognize that companies other than Disney could turn animated franchises into enduring revenue sources, early to see the importance of streaming-media distribution, and early to spot China’s potential to reshape the industry. ... Developing cartoon movies for kids, done right, can pay off big: If you create lovable and “sticky” characters, you can relatively easily monetize that initial IP investment across multiple movies, TV spinoffs, and lines of merchandise. ... The process is slow and costly. Films take three to four years to complete, progressing from ideation to storyboarding to using computer-generated imagery to animate minute details like the movement of hair and the texture of powdery snow. At DreamWorks Animation, a typical movie cost upwards of $140 million—not including marketing.
Smoking rates were in decline among well-educated consumers in developed economies; to make up for slipping sales, the companies were raising prices, which they could do for only so long. Meanwhile, a growing number of customers were switching to e-cigarettes in the hope of escaping their addiction or preserving their health. The devices, which use battery-powered coils to vaporize nicotine-infused solutions, had leapt on the scene seemingly out of nowhere. One of the first commercially available e-cigarettes had been created circa 2003 as a smoking cessation device by a Chinese pharmacist whose father had died of lung cancer. By 2013 the e-cigarette market had $3.7 billion in annual sales, according to Euromonitor International, and was expanding rapidly. ... Philip Morris International scrambled to fashion newfangled nicotine-delivering devices that would catch the wandering eye of the restless tobacco consumer. ... Everywhere you look in the industry, companies are pouring money into product development while borrowing liberally from the style of Silicon Valley. ... Tobacco executives often sound like media owners talking about content. That is, they’re open to delivering their drug via whatever pipe the consumer chooses—be it e-cigarettes, heat-not-burn devices, gum, lozenges, dip, or some medium that hasn’t been invented yet.
Why should we care about a Chinese chemical company buying a Swiss agricultural business, however mammoth the deal might be? For starters, it’s part of a wave of global consolidation in agriculture that will put an increasingly large portion of the world’s commercial seed market—roughly 50%—under the control of a few giant multinationals. In addition to the ChemChina/Syngenta union, Dow Chemical is buying DuPont, and Germany’s Bayer is in the process of swallowing up Monsanto, perhaps the most controversial producer of genetically modified seed species. This combined $170 billion deal binge promises to have a profound impact on the future of global agriculture. ... Beyond that, ChemChina’s purchase of Syngenta provides valuable insight about China’s broader view of its future. The deal signals important trends in the country’s policy on innovation, biotechnology, intellectual property, and globalization.
Talking Tom Cat was an instant hit, launching a franchise whose titles have reached No. 1 in more than 100 countries on the App Store. Today, almost 350 million monthly active users support the apps, and Tom’s YouTube channel has more than 2 billion views. Unlike many mobile app creators, the Logins have proved adept at turning popularity into profit. Playing Talking Tom triggers an onslaught of advertising and in-game purchase offers, and Outfit7 earns more than $100 million a year. In early 2016 the Logins decided to cash out, hiring Goldman Sachs Group Inc. to find the most lucrative deal. ... The industrialists were willing to match the Logins’ asking price of $1 billion and let their team maintain autonomy. Samo and Iza signed away their company—having never taken money from outside investors, their stake was worth about $600 million. ... It’s hard to see the synergies between a maker of chemical solvents and a digital cat perched over a toilet. And curiously, the buyer, which had recently been renamed Zhejiang Jinke Entertainment Culture Co., had revenue of only $133 million in 2016, according to Bloomberg data pulled from regulatory filings, and its gross profit was $55 million. Jinke won’t say where the money to buy Outfit7 came from. ... The deal activity can best be understood as a consequence of quirks in the Chinese stock market. In China, industrial companies trade at valuations they’d never receive elsewhere in the world. ... some may trade at as much as 100 times their annual earnings—more than four times the multiple of General Electric Co. This means they can acquire companies at what is effectively a discount. ... Chinese companies are betting that by adding game studios that have better margins than a stodgy industrial business, their stock price will rise.
A well-regarded hollywood insider recently suggested that sequels can represent “a sort of creative bankruptcy.” He was discussing Pixar, the legendary animation studio, and its avowed distaste for cheap spin-offs. More pointedly, he argued that if Pixar were only to make sequels, it would “wither and die.” Now, all kinds of industry experts say all kinds of things. But it is surely relevant that these observations were made by Ed Catmull, the president of Pixar, in his best-selling 2014 business-leadership book. ... The painful verdict is all but indisputable: The golden era of Pixar is over. It was a 15-year run of unmatched commercial and creative excellence ... The theme that the studio mined with greatest success during its first decade and a half was parenthood, whether real (Finding Nemo, The Incredibles) or implicit (Monsters, Inc., Up). ... The Disney merger seems to have brought with it new imperatives. Pixar has always been very good at making money, but historically it did so largely on its own terms.