You’ve heard the one about The Beatles’ album which, when played backwards, says ‘Paul is dead’, right?
It was a fun conspiracy theory (though it was a simpler time — imagine what they’d find on it these days with 5G chips in every COVID vaccination!).
It was, of course, untrue.
I haven’t had my COVID vaccine yet (they’re booked out!), but I expect my phone signal to improve when I do.
(I can’t decide whether to make sure you know I’m kidding, or just watch the emails roll in from those who think I’m serious. Somehow, I don’t think I’m going to stop them, either way, but for the record, I’ll be getting the jab as soon as I can. And no, it’s not some Bill Gates New World Order plot.)
Now, where was I?
That’s right — songs being played backwards.
There’s something of an ASX analogy — it’s not a conspiracy, but it’s equally silly — which plays out, in one form or another, almost continuously.
It’s the forwards-backwards dance of acquisition-and-spinoff, merger-and-demerger.
The latest, of course, is Westpac’s reported consideration of parting ways with its New Zealand operations.
That news comes on the heels of Treasury Wine Estates (I own shares) considering spinning off the Penfolds brand.
And Crown, back in the day, trying to list its property assets in a separate entity.
Woolies is about to spin off Endeavour Drinks.
It’s kind of a trend.
But it’s not a one-way story.
Google (I own shares) once-upon-a-time bought YouTube.
IOOF has acquired MLC.
Ramsay Health is buying UK hospitals.
Carsales bought 49% of a US classifieds mob.
And there’s Tabcorp, which is either being taken over, selling assets, or spinning them off. It kinda depends what day it is!
Then there’s the merry-go-round:
It wasn’t that long ago that Treasury itself was merged into Carlton & United Breweries. Then spun out.
Or that long ago that our banks bought into NZ, and strapped on wealth management arms (now also all-but gone).
Woolies bought — and then sold — EziBuy, the online catalogue retailer.
BHP has had as chequered a career as anyone on that front, too.
You’d almost be forgiven — and forgive me, as I drop into an almost-conspiratorial whisper — for thinking that the common thread here is ‘activity’, maybe even encouraged by investment banks and brokers who (I know, I’m surprised too), stand to make a cut of the transaction.
Surely not.
Right?
Well, I’ll let you make your own decision on that one.
What I will say is that CEOs and company boards, like the rest of us, find it bloody hard to resist the temptation to just leave things alone.
They feel compelled to tinker, driven by the idea that they might be able to ‘create value’ through the ‘synergies’ of a merger, or the ‘increased focus’ of a divestiture.
That both can’t be simultaneously true seems to elude them, or perhaps they just think they’re the exception to the rule.
After all, CEOs don’t get the big chair by lacking confidence…
And the blame doesn’t lie just with CEOs, either.
We investors are happy to accept — or sometimes even encourage — the sort of thinking that gives us what I’ve decided to call ‘piano accordion capitalism’(
).
In. Out. In. Out. In. Out.
When we bid up a company’s share price after they announce a merger, we’re implicitly approving the decision.
When one company becomes two — and the market capitalisation of the two businesses is higher than when they were a single company — we’re justifying the decision.
Why wouldn’t a CEO do those things, when they’re given share price ‘applause’ as a result?
We’re also very fickle, though — if things don’t work out, we’re only too happy to knife the incumbent and blame him for our problems.
It’s good to be the king.
So which is it?
Should we be cheering on mergers?
Or pushing for divestments?
Or should we be wary of acquisitions and preferring our companies to keep their businesses intact?
Alas, dear reader, there is no easy answer.
There are plenty of cases that support the ‘don’t just sit there, do something’ approach, and plenty of cases that make you wish the top brass had just played golf that day, instead.
Which is, in its way, the point.
If something is a crapshoot, doesn’t it stand to reason that, for all of the costs, hassle, disruption and uncertainty, the better course of action is just to leave well enough alone?
It’s a pipedream, of course.
CEOs spend their lives with investment bankers and short-term investors in their ears; exhorting them, in Warren Buffett’s baseball metaphor, to ‘swing, ya bum’!
And so, the decision falls to us, as investors.
If we can’t control the CEOs and boards, we can at least control our own emotions and decisions.
And we can remember that the motivation of those who would make these things happen is almost always short-term in nature. So, the bottom line is, unfortunately, that we should be sceptical.
As a Treasury shareholder, I hope the company resists the urge to demerge its crown jewel, even if, in the short term, the combined price jumps a little.
If I was a bank shareholder, I’d want Westpac to keep its NZ operations — and I’m on record as saying I think the banks will rue spinning off their wealth management businesses. After all, long term mortgage debt can only rise as fast as wages (plus or minus any change in interest rates), while wealth management has a long term, compounding, tailwind!
Again, though, some spin offs will be good for shareholders. And some acquisitions will truly create long term value.
So there’s no easy answer other than, as Buffett’s right hand man Charlie Munger would suggest, to keep an eye on the incentives at play — and to keep a slightly sceptical countenance.
(Alternatively, if you want to buy all of the parts of my car for more than the market is offering for the whole thing, give me a call. I’m sure we can come to an arrangement!)
Fool on!
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