By DAVID MOON, Moon Capital Management,
April 20, 2008
A stockbroker called
me in 1987, certain that Wachovia Bank was about to purchase a bank in
Naples, Florida. At the time, the stock was trading a
little above $30 a share. He was right, but the takeover price was only $27 a
Maybe 'takeunder' would have been a better term.
That should have taught me to view mergers and
acquisitions announcements with a jaundiced eye.
When America Online purchased Time Warner in 2001, it looked a lot like some
lawn-fertilizing company buying the 23-story RiverviewTower office building.
Internet service was becoming a commodity. AOL was a nice entry-level plan for
grandma. It was like the World Wide Web with training wheels.
Eventually everyone was going to learn to ride the Internet bicycle ' and they
wouldn't be willing to pay a premium for mere access to the
AOL had to reach out to a new strategy ' content ' or risk dying. Time
Warner, with its huge film library and CNN news division, was the perfect
Besides, AOL's stock price was ridiculously overpriced. I figured founder Steve
Case was trying to buy something of real value before the bubble
AOL Time Warner was born.
Bad pairing. Since the acquisition, AOL's business has floundered. The AOL
assets were written off, creating a reported loss of $99 billion in 2002.
By 2003, AOL was no longer even part of the name.
The most valuable part of the company is the content area. So much for AOL ' and
In 2002, Hewlett-Packard faced a somewhat similar decision. The printer business
was becoming increasingly commoditized. Printers that used to cost $1,000 were
now $150. Lexmark and scores of competitors were offering very similar
Suddenly, the HP brand didn't seem so special.
HP went shopping and bought Compaq.
Compaq was also struggling. Like HP, it also manufactured a commodity product.
And also like HP, its market share was in decline.
It looked like they were taking two losers and putting them together. I expected
the result to be one huge loser.
I was wrong.
After acquiring Compaq, the Hewlett-Packard Company has continually grown market
share. Even after the recent market decline, its shares are still 400 percent
higher than at the time of the merger.
So sometimes an unlikely-looking merger seems to
Some recent deal news that fascinates me is Blockbuster's announcement that it
has tried to buy CircuitCity for at least $6 a share. CircuitCity management has dismissed the offer as
either inadequate or not legitimate.
This is the same management that found reasons to dismiss a $17 a share offer
from another potential acquirer 38 months ago.
Acquisitions are often offensive moves, where a company seeks to exploit a
geographic or product area where it thinks it can create an operational synergy.
In Blockbuster's case, however, the offer seems, on the surface, purely
defensive. Of course the company has issued statements claiming that a
combination of the two companies would create a juggernaut capable of competing
with Apple stores in selling entertainment-delivery hardware.
Other than cash, however, what does Blockbuster really bring to the deal? A
bunch of empty stores? CircuitCity already has plenty of
Like Hewlett-Packard and AOL, Blockbuster needs a survival strategy. Let's see
which precedent plays out.
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).