Mergers and acquisitions…classic bear traps

Thursday, 15 September 2022 — Albert Park

[7 min read]

Dear Reader,

There’s a long-held view in the world of finance that a flurry of business activity in the form of mergers and acquisitions, affectionately known as M&As, often mark the top of a long-drawn-out bull market.

It’s a signal that traders and savvy fund managers sometimes use to determine a market tipping toward the edge of being dangerously overvalued.

A phase in the business cycle that calls for discipline.

However, for the majority, M&A activity is usually a trap that pulls investors in at just the wrong time.

Directors, CEOs, and executives are equally vulnerable as the small-time investor when it comes to poorly timed investments.

FOMO is a powerful force across the business arena.

And in the corporate world the stakes are far, far greater when it comes to buying at the top.

The curse of the multibillion-dollar write-offs

I’d like to share with you an example from the tech world so we can relate this to where we sit in the upcoming commodity boom.

Buying at the top of a market has become the fabled legacy for many a prominent CEO.

He (or she) who decided to go ‘all-in’ at precisely the wrong moment will hold that stain for the remainder of their corporate career.

And in recent times there’s been no better example than the US$44 billion takeover of Twitter.

On 14 April, Tesla CEO Elon Musk offered a 38% premium to Twitter’s 1 April closing price.

And just nine days later, in his usual self-publicised style, Musk triumphantly ‘tweeted’ the deal had gone through with the Twitter board unanimously accepting his offer.

However, humility soon took hold…

On the backdrop of a Ukrainian crisis and rising interest rates, Twitter’s share price fell hard.

Adding weight to this was an industry that was starting to flounder as investors started to feel the pinch of holding overvalued assets that sat somewhere ‘in the cloud’.

Reality was starting to bite.

Buying for ‘future’ momentous profits was no longer a sound strategy.

And, as Twitter continued to fall, Musk attempted to scramble his way out of the takeover.

The chart below neatly summarises the events that took place against the Twitter share price, from April to July of this year:

Right now, the deal sits with the US courts as Musk tries to disassemble the mess.

But the tech giant billionaire certainly isn’t alone in his poorly timed acquisition.

And stunningly, it’s one of the most trusted computer brands we’ve all relied upon at some point that seems to have completely dropped the ball.

In January 2022, Microsoft agreed to buy a gaming company called Activision Blizzard for a staggering US$68.7 billion!

This was Microsoft’s largest deal ever.

And there’s no backing out like a regular investor.

Once the contract is signed, the deal is done.

Is this the end for tech?

Major tech buyouts have been a theme throughout 2021 and 2022.

So does this mark a top for this six-year-plus bull market?

Perhaps.

Recent market events are only adding to this outlook.

A repeat of the 2000 dotcom bust is certainly on the cards.

I’m sure the board at Microsoft will be holding on for dear life over the coming months.

The chart below, if it plays out, will be the stuff of nightmares for years to come for tech CEOs.

Major company buyouts are a sure sign that things are about to turn ugly…

Monthly Chart NASDAQ-100 Technology Sector Index

Mining suffered the same fate a little more than 10 years ago

Step back in time to the last commodity boom, and you may remember multibillion-dollar buyouts happening virtually every single month amongst the major mining companies.

This was most prolific around the peak from 2010–11.

Companies were aggressively out-bidding each other on $20, $30 billion deals!

I sat in the middle of this action as a geologist working for one of the darlings during this time, Equinox Minerals.

Equinox was an Australian-owned copper producer operating in Zambia that grew from a penny stock in the early 2000s to a $7 billion giant.

Was it worth $7 billion?

Well, in 2011, Barrick Gold thought so.

Barrick was the world’s largest gold producer at the time.

Despite teams of in-house analysts, accounts, lawyers, and economists, the company had little idea it was making a major acquisition at the very peak of the market.

The company was left reeling after the asset it purchased underwent a $6 billion write-off little more than 12 months after the deal went through.

As so often is the case in frenzied corporate FOMO, proper due diligence was replaced with getting the deal done at all costs.

And the deal certainly got done.

While Equinox shareholders rode off into the sunset, Barrick managers and executives were left shaking their heads.

They simply couldn’t comprehend how they got it so wrong.

The CEO was fired.

Barrick never recovered from this ordeal, as the chart below illustrates…

Monthly Chart Barrick Gold [NYSE:GOLD]

What was once the world’s largest gold miner now languishes in the background as a relatively insignificant minnow.

I was able to witness, first-hand, one of the costliest of all corporate stuff-ups, buying at the very peak of a multiyear bull market.

It showed me how companies are just as likely to do this as the everyday investor.

The Barrick example was just one of many at the time…

In 2010, Rio Tinto acquired Riversdale Mining for around $3.7 billion.

Three years later it disposed the asset for about 2% of the purchase price!

Again, in 2011, Rio Tinto continued to buy into the market euphoria and purchased a company called Coal & Allied Industries.

Later selling it for about a third of the original price.

While in 2012, Glencore, another major in the industry, agreed to buy Xstrata for a blowout figure totalling more than $38 billion.

This was one of the biggest deals ever in mining at the time.

Less than 12 months later, Glencore published its first results from the merger announcing that it had taken a $7.6 billion write-down.

The list is endless.

The Financial Review, looking back on the transactions that took place over that crazy period, neatly summarises:

‘Unfortunately, mining industry executives have a tendency to lose their sense of perspective and judgement when confronted with the prolific cash flows generated in the up cycles in commodities.’

Indeed, they do.

Which is why we need to be on our guard as investors.

M&A activity in mining — are the cracks starting to show?

We can use these lessons to guide our future investing.

M&A activity gives us one such tool.

If you’ve been reading the news of late, you may have noticed that BHP recently made a bid for the South Australian-based copper producer, Oz Minerals.

It was bringing the ‘A’ back into M&A activity.

Something the industry hasn’t seen much of, of late.

But is this a cause for concern?

Not really.

The recent BHP deal was a conservative attempt to strategically merge the Olympic Dam infrastructure with OZ Minerals’ nearby copper-gold deposits.

In other words, it made logistical sense based on sound perspective and reasoning by the BHP board.

In fact, it’s a positive sign, while still tempered, that we are seeing some M&A activity brewing in the sector.

The feeling on the ground is buoyant but nowhere near the euphoria of 2010 and 2011.

This is YOUR opportunity to ride the next major bull market.

I’ll have more to say about that next week…

Until then,

James Cooper,
Editor, The Daily Reckoning Australia

Dear Reader,

‘If we run out of food this winter, we've always got each other.’

Hannibal Lector

We have a plethora of new readers. Many have practical questions.

But there are other issues: Who are we? What are we doing?

Some accuse us of being silly ‘liberals’. Or even ‘left wingers’. Others are sure we’re gun totin’, MAGA hat wearin’, Trumpistas. One reader (perhaps relying on our poorly worded prose) levelled the most incendiary charge of all; he accused us of having voted for Joe Biden.

Some readers think they see a hint of nihilism…some suspect us of antinomianism. And some are just puzzled by what must seem a sour temper, with a ready contempt for every ‘ism’ on offer.

Who are we? What are we? What noxious creed lurks between our words?

A remark by French President Emmanuel Macron set our mind to a-thinkin’ about it.

‘The best energy’, said he, ‘is the energy you don’t use’.

Really?

We use energy to heat our houses, to run our factories, and to move us from point A to point B. Would it be better not to?

The best meal is the one you never eat?

The best kiss is the one you never get?

And that lucky break you’ve been waiting for? The best one is the one that never comes?

A dear reader, Bill T, sent us this real photo, taken in Northern California:

The road not taken

The Tesla is now relying on old-fashioned, planet-destroying gasoline in order to do what it couldn’t do on its own. So, as of this photo, the trip was still one of the best ones the driver never took.

The best of our daily columns is, of course, the one we never write. And our best opinions are the ones we don’t have.

But the only way to makes sense of Macron’s head scratcher is to apply it where its author did not — to something you shouldn’t do anyway, i.e.: The best murder you ever commit is the one where no one is harmed.

Which leads us effortlessly to our political affiliation: we have the best one; that is, none at all. How could we see the action on the field clearly if we were rooting for one team or the other? How could we observe the great mob if we were in the middle of it?

And how could you expect to get anything of value from us if we only confirmed your own prejudices?

Oh…dear, dear reader…here is a ‘trigger warning’. This is no ‘safe space’. This is meant to be a ‘dangerous space’, where you come face to face with ideas you may not like. We might not like them either; we only bring them up because they might be right.

That which governs least

Yes, dear reader…we are innocent of all charges. We didn’t vote for Biden. Or for Trump. Neither, we figured, was worthy.

But who is? After all, the best politician is the one who never ran for office, who never cast a vote…never mouthed a slogan…never took a bribe (oops…did we say ‘bribe’? We mean ‘campaign contribution’)…and never attempted to tell anyone other than himself what to do.

That is, the best politician is the one who is not a politician at all. Which accounts for why those who are politicians are very far from the best. Not even second best. They are almost all sleazy grifters…ready to say anything or do anything to hold onto power.

Power corrupts. And at this late, degenerate Fin de Bubble stage, the US empire is the most powerful that ever existed. The best power is, of course, the power you don’t have. And those who do have it are…surprise!...corrupted by it.

Our job here is not to join a party…a cause…or a movement…not to push an ideology…wave a flag or find a solution…nor to cast blame or stones…

…but merely to watch. And if we pay attention, and are really lucky, we might see some vague shadow, perhaps reflected in a dirty windowpane for a second or two, of what is really going on.

More to come…including, tomorrow, a look at the US’s best political party: the one that no longer exists.

Regards,

Bill Bonner,
For The Daily Reckoning Australia