Purchase scenarios can play out different

By DAVID MOON, Moon Capital Management, LLC
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 share.

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 web.

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 content cornucopia.

Besides, AOL's stock price was ridiculously overpriced. I figured founder Steve Case was trying to buy something of real value before the bubble burst.

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 $99 billion.

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 products.

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 work.

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 those.

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).

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