September 2, 2019 BARRON’S 7
The Humpty-Dumpty Market
HUMPTY-DUMPTY ISN’T USUALLY AN EXAMPLE ANYONE
wouldwanttofollow.Itslessonisthatit’sdamnhard
to reconstitute something that has been broken. The
questionthathangsoverHumpty-Dumpty’splightis
whydidhetumbleoffthatwallinthefirstplace?And
who should pay the price for his mistake?
In fact, Humpty-Dumpty is a parable for modern
mergersandacquisitionsinthislate-cyclemarketwithlowbondyields
andloftyshareprices.Thisappearstobeaperfectmarket
for companies to attempt what Humpty-Dumpty so fa-
mously failed to do: put themselves back together again.
InaHumpty-Dumptydeal—I’mcopyrightingtheterm—
a company breaks itself apart, then, after a number of
years,decidestogetitselfbacktogetheragainthrougha
merger.They’rerelativelyrare.Whencompaniesbreakup,
likeHewlett-Packardafewyearsago,and AbbottLabora-
tories (ticker:ABT)andDowDuPontmorerecently,thelib-
eratedunitsalmostimmediatelyevolveinnewdirections.
Theygrowapart.TheHumpty-Dumptydealtriestoreversethattrend.
Theoriginsofmanyofthesedealsinvolveregulatoryinterventions,which
mayexplainmotivationstoreassembleHumpty.Thecurrent AT&T (T)
isinpartarecreationoftheoldMaBell,brokenupbyantitrustauthori-
tiesin1982.Exxon’s1999acquisitionofMobilreconstitutedmuchofthe
old Standard Oil. Both worked pretty well.
Currently,therearetwomoreproblematicHumpty-Dumptydealson
tap, one announced, the other in gestation. CBS (CBS) and Viacom
(VIAB)aremerginginanall-stockdeal,orchestratedbyShariRedstone’s
NationalAmusements.Her96-year-oldfather,Sumner,starteditoffin
2000, when his company, Viacom, acquired CBS, driven in part by new
FederalCommunicationsCommissionrulesthatallowedmediacompanies
toownmorethanoneTVstation.Itdidn’ttake.Sumnersplitthecom-
panyagainin2006,whileretainingcontrolofboth.NowShari,afterresis-
tance from CBS (undermined by the fall of CBS mastermind Les
Moonvesaftersexualmisconductallegations),iscombiningthetwoagain.
Asimilarreconciliation,meanwhile,isintheworksatthesmokeshop.
In2008, AltriaGroup (MO),therenamedPhilipMorrisbestknownfor
Marlborocigarettes,splitup.AltriaretainedtheheavilyregulatedU.S.
marketandthename. PhilipMorrisInternational (PM),gottherest
oftheworld.PhilipMorrishassinceoutpacedAltria,althoughbothhave
seencigaretteconsumptionfall,whichmaybegoodforhumanitybutbad
forthem.Sonow,despitestrategicdifferencesonhowtogetintothee-
cigarettebusiness(Altriahasa$12.8billionstakeinJuulLabs)orride
thecannabiswave(Altriahasa45%stakein CronosGroup [CRON]),
they’re talking about hooking up again.
Shareholdershaven’tbeenpleasedbyeitherdeal.ViacomandCBS
arebothdownmorethan10%sincethedealwasannouncedinmid-Au-
gust, and Altria has slipped almost 5% since news of talks broke last
Tuesday, while Philip Morris is off over 13%. But problems with
Humpty-Dumpty deals go deeper than just miffed investors.
Therationaleforbothdealsisscale.Tocompeteinmediaorinnico-
tinedemandsjumboscale.Everybodyknowsthat.Scaleisanotherway
of saying consolidation. Analysts generally like scale arguments, until
theydon’t.MoreresourcesmeancompaniescanengageinmoreM&A,
morebuybacks,andfatterdividends.ShariRedstoneisalreadytalking
aboutViacomCBSbuyingitswayintotheleagueofmegas-
cale media players. And some observers are speculating
thatshewouldn’tbeunhappytofindabuyerforthecom-
pany.Analystsarewhisperingaboutinvestmentsareunited
PhilipMorrisandAltriacanmakethatwillfreethemfrom
the seemingly inevitable decline of the smokes business.
Ofcourse,it’sinthenature ofthingsthatM&Aset-
tlesintocycles:getsmall,gobig;consolidate,restructure;
goprivate,gopublic,gobankrupt.WallStreetisbuilton
thesecycles,andbasksinfeesateveryturnofthewheel.It’sthesource
ofWallStreet’stransactionalreputation:encouragingdealsinoneyear
thattheywillbehappytofix,forafee,inanother.Whilethereistruth
inthecharge,it’salsounfair.WallStreetsellsservices,andbankersare
salesmen. But boards and C-suiters make the actual calls.
And they also get the largest rewards, which is amazing, given that
Humpty-Dumptydealsare,almostbydefinition,admissionsoffailure.If
a board thinks a company needs to be broken up, then decides it must
turnthatplaninsideout,thensomeonemisjudgedthefuture.Itbegins
tolooklikeashellgame.Fewfearedcord-cuttingorstreamingin2006,
butSumnerwaseagertomaximizeCBS’andViacom’smarketvalue.And
thetopfolksatAltriawerenotfrettingovertobaccosubstitutesasmuch
as exploiting a U.S.-overseas regulatory arbitrage in 2008.
Let us offer some necessary caveats. First, the folks who voted to
breakupoftenaren’tthosewhoseekreconciliation.Second,M&Aexists
becausethefutureisuncertainandpeopleareimperfect.M&Aisone
ofanumberoftoolstocopewiththatchange,butit’sabluntinstrument
that’stimeconsuming,expensive,andrisky.Majordealsresemblegoing
towar:Therearealwayscasualties.Companiesarerippedapart.Work-
ers lose jobs, customers get stiffed, shareholder money goes up in
smoke.Andthatdoesn’tcountoutlierrisks,like Bayer (BAYRY)discov-
eringMonsanto’sRoundupweedkillerwasaswampofclass-actionsuits.
(Bayer may well wish it could do a reverse Humpty.)
ButaHumpty-Dumptydealisn’tjustaboutspinningsomethingoffand
wantingtogetitback.It’saboutreversingthemostfundamentalkindof
corporatereshaping,shortofinsolvency.That’snottosaythatViacomand
CBS,orAltriaandPhilipMorris,won’tbesuccesses.Itistosaythatno
one would be surprised to see them fall off that wall again.
WallStreetisbuilt
onmerger-and-
acquisitioncycles,and
basksinfeesatevery
turnofthewheel.
Streetwise
by Robert Teitelman