Why Did the CEO Buy That Company?
Hey! Why are you buying that company?
Verizon Chief Executive Officer Lowell McAdam’s explanation Tuesday for why his company was spending $4.4 billion on AOL was, shall we say, less than felicitous:
Verizon’s vision is to provide customers with a premium digital experience based on a global multiscreen network platform. This acquisition supports our strategy to provide a cross-screen connection for consumers, creators and advertisers to deliver that premium customer experience.
McAdam’s remarks -- from Verizon’s press release announcing the acquisition -- did get a little better after that:
At Verizon, we’ve been strategically investing in emerging technology, including Verizon Digital Media Services and OTT, that taps into the market shift to digital content and advertising. AOL’s advertising model aligns with this approach, and the advertising platform provides a key tool for us to develop future revenue streams.
OTT is short for “over the top,” and refers to the Internet television service that Verizon plans to offer starting this summer. There was also a fleeting mention in the announcement of “Verizon’s IoT (Internet of Things) platforms.” Presumably because that sounds, you know, modern and progressive.
All this got me thinking: Does any CEO ever offer a really good official explanation of why he or she is acquiring another company?
Well, here’s McAdam’s counterpart at AT&T, Randall Stephenson, explaining a year ago why his company was buying DirectTV:
This is a unique opportunity that will redefine the video entertainment industry and create a company able to offer new bundles and deliver content to consumers across multiple screens -- mobile devices, TVs, laptops, cars and even airplanes. … DIRECTV is the best option for us because they have the premier brand in pay TV, the best content relationships, and a fast-growing Latin American business.
The funny thing here is that Stephenson’s goal of being able to offer content on lots of screens is pretty much identical to McAdam’s, albeit expressed more clearly. But AT&T and Verizon are following very different acquisition strategies to get there, with AT&T snapping up a pay-TV provider somewhat like itself and Verizon buying a whatever-the-heck-AOL-is. One of those approaches will turn out to be more right than the other, and I’m not sure which it is, but AT&T’s does seem at least simpler. It is mainly buying relationships with customers and content providers, while Verizon is trying to acquire capabilities and maybe content -- and as my Bloomberg View colleague Megan McArdle pointed out Tuesday, it’s hard to get a good deal on those.
Verizon is also trying to get investors to think of it as a technology company, and technology companies pretty much have to make sweeping statements about the future in their merger announcements. Consider Nokia CEO Rajeev Suri on the acquisition of Alcatel-Lucent, which was announced last month:
Together, Alcatel-Lucent and Nokia intend to lead in next-generation network technology and services, with the scope to create seamless connectivity for people and things wherever they are.
Or Richard Clemmer, CEO of NXP Semiconductor, on buying Freescale Semiconductor:
Today’s announcement is a transformative step in our objective to become the industry leader in high performance mixed signal solutions. The combination of NXP and Freescale creates an industry powerhouse focused on the high growth opportunities in the Smarter World.
You can see how Verizon’s McAdam was trying to emulate this. Cross-screen connection is a form of seamless connectivity. And the Internet of Things is the same thing as the Smarter World, right? Tech jargon will set us free, or at least raise our earnings multiples.
After that it can be refreshing to turn to a more down-to-earth industry such as oil and gas, where acquisitions basically involve…buying more oil and gas. Here’s Ben van Beurden, CEO of Royal Dutch Shell, explaining the $79 billion acquisition of BG Group -- the year’s biggest merger to date.
BG will accelerate Shell’s financial growth strategy, particularly in deep water and liquefied natural gas: two of Shell's growth priorities and areas where the company is already one of the industry leaders. Furthermore, the addition of BG's competitive natural gas positions makes strategic sense, ahead of the long-term growth in demand we see for this cleaner-burning fuel.
You might think that buying the maker of Velveeta and Lunchables would be a similarly straightforward matter. But Bernardo Hees, CEO of Heinz, started with this somewhat airy pledge in the Kraft merger announcement:
Together, Heinz and Kraft will be able to achieve rapid expansion while delivering the quality, brands and products that our consumers love.
In the next sentence, though, Hees -- who is also a partner in Heinz controlling shareholder 3G Capital, a private-equity firm with Brazilian roots that is known for its focus on cutting costs -- began sending signals about how things were going to go down:
Over the past two years, we have transformed Heinz into one of the most efficient and profitable food companies in the world while reinvesting behind our key brands and continuing our relentless commitment to quality and innovation.
OK, Kraft. You’re next!
In the pharmaceutical industry, most acquisitions involve established companies with big sales forces and shrinking drug pipelines acquiring biotechs with new drugs to sell. As a result, the CEOs of the buyers tend to say similar things. They don’t need to explain why they’re making an acquisition, they just need to convince investors it was the right one, at the right price. Hospira, according to Pfizer’s Ian Read, “is an excellent strategic fit for our Global Established Pharmaceutical business, which will benefit from a significantly enhanced product portfolio in growing markets.” Which sounds a lot like Valeant’s J. Michael Pearson: "Salix's market-leading gastrointestinal franchise is an ideal strategic fit for Valeant's diversified portfolio of specialty products." As for Pharmacyclics, said AbbVie’s Richard A. Gonzalez, "Its flagship product, Imbruvica®, is not only complementary to AbbVie's oncology pipeline, it has demonstrated strong clinical efficacy across a broad range of hematologic malignancies and raised the standard of care for patients." If had been a narrow range of hematologic malignancies, the deal would have been off, one gathers.
Then there are the cases where the rationale for a deal is totally obvious, but the CEO feels like he can’t say it out loud. Outside analysts described the merger of Broomfield, Colorado-based Ball and London-based Rexam, announced in February, as a straightforward consolidation play. Between them the two companies control about 40 percent of the global beverage-can business, 60 percent of the North American market and 69 percent of the European market. By joining forces they can cut costs and gain negotiating power with both suppliers and customers. This of course raises antitrust concerns that the companies are likely to spend the rest of the year talking over with regulators. So here’s what Ball CEO John A. Hayes said:
The combination of Ball and Rexam creates a global metal beverage packaging supplier capable of leveraging its geographic presence, innovative products and talented employees to better serve customers of all sizes across the globe; while at the same time generating significant shareholder value. Today's announcement aligns with our Drive for 10 strategic vision of maximizing value in our existing businesses, expanding into new products and capabilities, aligning ourselves with the right customers and markets, broadening our geographic reach and leveraging our know-how and technology.
Next time, I think, he should promise seamless beverage connectivity via the Internet of Cans.
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