Summer of Synergies
While President Barack Obama has declared this to be the Summer of Recovery, I’m going to declare it as the Summer of Synergies. At great risk of sounding like an anti-capitalist I’m going to give you examples of what our current economic situation has driven companies to do in the search of maintaining and growing profits. This will come as no surprise to people who are living in the real world, i.e anyone subject to the rumor mill that your department is about to be downsized, again. Currently the majority of corporations that have survived the past couple of years have cut investments into areas that do not require immediate attention, put hiring freezes in place, cut raises, cut bonuses, cut profit sharing, this has resulted in corporations having great war chests full of money.
The political outlook is uncertain for the United States, and the rest of the Western world is in a sovereign debt crisis with concerns that Greece, Spain, Portugaul, will default in the coming future, and adding to debt pressures word from Morgan Stanley that the USA will default on some of its debt obligations in time, not to mention our rising debt levels not seen in decades. S&P is also warning of the USA losing its AAA credit rating. Corporations who have shareholders and stakeholders like debtors to respond to for their actions sitting on cash, or in some cases raising dividends and betting on sure things make the most sense.
Given the economic and political situation what we are seeing instead of a “Summer of Recovery” is a “Summer of Synergies”.
The corporations that have great war chests are spending it on sure things; buying synergistic companies. The reasoning is to raise productivity, and cut employee head counts, while maximizing profitability.
These corporate synergies of late seem to be downplayed in the press, as if avoiding newfound synergies doesn’t make them real. In fact it was all the rage up to the market peak in 2007 companies were shameless in promoting the synergies that were found with their new found merger and acquisition strategies that often pushed inflated stock prices even higher. The stark contrast between the M&A activities of 2-5 years ago is that many of those deals were debt backed to increase leverage, these new deals are mostly cash from the war chest.
Recent big corporate deals that are sure to find some synergies are:
Amazon buys Woot
Yes if you somehow didn’t know this already Amazon acquired the highly addictive we sell one item a day, except on Woot-Off’s. The company is supposed to be able to run as an independent subsidiary of Amazon.
Price: approximately $100 million.
Synergies found: Increased web store presence found for Amazon, better volume shipping rates for Woot, another place to sell Kindles, increased revenue to Amazon’s bottom line.
Sonic buys DivX
Sonic is known to many as the CD/ DVD burner software that often comes bundled with your new computers. Divx is known to every computer geek as the compression technology that makes an 8GB DVD a highly watchable and easily downloadable 700mb file.
Price: $323 million.
Synergies found: eliminating corporate compliance officers between 2 companies to maintain a publicly traded company, marketing, software programmers, increased software bundling opportunities.
Intel buys McAfee, Inc.
Seen as a bit more crazy of a merger than most of the others burning up the news, but Intel has been talking for years of adding more hardware based security, and DRM to their chips. Purchasing McAfee will surely add to this strategy.
Price: $7.68 billion.
Synergies found: Less programmers needed to hire to implement chip based security functions, eliminating corporate compliance officers between 2 companies to maintain a publicly traded company, marketing, software programmers, software bundling opportunities with new hardware sales.
Cisco and Extend Media
Cisco is known to acquire any company that can help it expand it’s reach into internet dealings. This is another prime example of capturing growth with little investment by purchasing more mature developed idea, currently the price is not known. It is allowing Cisco to gain more market share the increasing IP video market place.
Price: Undisclosed
Synergies found: integration of sales staff selling Extend Media products through Cisco sales channels, streamlined marketing efforts.
Berkshire Hathaway and Wesco Financial
Warren Buffet’s company is looking to buy out the rest of Wesco Financial taking it 100% under it’s ownership, Berkshire Hathaway is currently a majority shareholder.
Price: $500 million.
Synergies found: eliminating corporate compliance officers between 2 companies to maintain a publicly traded company, increased Berkshire Hathaway cash flow for investing opportunities.
Dell and HP fight over 3PAR
To how how well 3PAR is valued Dell offered $18 per share to 3PAR, HP decided that they wanted it for $1.5 billion. Dell reevaluated their offer and is now going to finalize the offer at $24.30 per share or $1.6 billion. HP decided it really, really wanted 3PAR and offered $27 a share, Dell decided to match the offer at $27 per share. Over the weekend HP decides it’s had enough and offers $30 per share or $2 billion for those of you counting, and tells Dell to go away.
The most interesting thing about this particular acquisition in the market is that HP, a company with a rich history of putting its executives in Career Purgatory and does not have a permanent replacement CEO just spent $2 billion on a company.
Price: $2 billion and counting.
Synergies found: eliminating corporate compliance officers between 2 companies to maintain a publicly traded company, marketing, software programmers, expanded presence in a staple industry for SaaS; cloud computing.
United Airlines and Continental Airlines
While this has been rumored for a while, and had a false start or two, this summer the deal has received EU and US Department of Justice Approvals is likely full steam ahead for completion this October. Since both are still recently exiting bankruptcy there are still plenty of areas that can be combined for cost cutting.
Price: Stock swap.
Synergies found: Decreased marketing costs, streamlining of frequent flier programs, decreased fuel costs through economies of scale, decreased competition on same routes, increased ticket prices, eventually negotiating better union rates with pilots, and flight attendants, eliminating corporate compliance officers between 2 companies to maintain a publicly traded company.
HealthSpring buys Bravo Health
This is a deal that isn’t getting as much coverage because it actually makes a lot of sense on paper with two health care companies hooking up. Another interesting note is that this deal is backed by debt with some large banks putting the capital up on this deal. The new combined entity will be the biggest in the country that focuses exclusively on the Medicare Advantage population.
Price: $545 million.
Synergies found: Access to over 390,000 new customers, economies of scale in administering new customers, better able to navigate the new climate as a result of the new health care law, immediately adds revenue to the bottom line.
Intel buys Infineon Technologies wireless unit
In another blockbuster deal Intel is buying the wireless unit of Infineon Technologies which is a provider of wireless chipsets for products like the iPhone.
Price: $1.4 billion cash.
Synergies found: hardware bundling with processor and wireless platforms.
Check out Part 2 of Summer of Synergies.
Feel free to leave some comments if you happen to become one of the “synergies” pre or post merger.