The baffling disappearance of M&A

Can't companies see the positive transformation these deals bring? What are these putative buyers scared of?

By Jim Cramer Jul 1, 2013 9:44AM

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Handshake (© Corbis)The mergers went and disappeared. Sure, Monday marks the beginning of an auction for Onyx Pharmaceuticals (ONXX), one of the best biotechs out there (TheStreet). This is a deal that will lead to huge value created for the shareholders of this amazing company -- and maybe it will herald the beginning of a new wave of deals in a market starved for mergers and acquisitions.


Somehow, though, I don't think so. The Onyx deal, borne of the lack of growth at its initial suitor, Amgen (AMGN), should be a wake-up call to all of the companies like Amgen out there: Get your act together, and find a company that can make your shareholders richer when you acquire it.


However, that doesn't seem to be the way of the world. In fact, it's the opposite. There's been this remarkable groupthink that acquisitions have led to failed enterprises, and that the best gains are happening via break-ups -- not by adding on to the institution.


But compare that negative impression with the reality that's before us. Last week, ConAgra (CAG) reported earnings, and it was a beautiful thing -­- CEO Gary Rodkin's insistence on buying Ralcorp produced far more bottom-line benefit than anyone had thought, especially this early on in the consummation. ConAgra was able to break the gravitational pull of the 10-year Treasury bond, which had taken down many of the bond-market-equivalent stocks with its newly high yield. At ConAgra, the earnings were so strong that they allowed people to consider that more dividend boosts were on the horizon. That's how quickly this company has been able to pay down debt from the robust earnings.


We saw the same thing, on a smaller scale, in the packaged-goods business, when B&G Foods (BGS) bought Pirate's Booty. This was a large acquisition for an acquisitive company with a terrific track record in revitalizing older brands that previous ownership could no longer improve upon.

Or consider the amazing appreciation of Tenet Health (THC) on its acquisition of rival Vanguard Health Systems, or the huge run in the stock of Actavis (ACT) after it acquired Warner Chilcott in an all-stock deal.


Can't other companies see this transformation? Are the M&A bankers so inept at being able to sell these kinds of deals to the CEOs of potential acquirers? What are these putative buyers scared of? I can't think of a deal that has brought down the stock of an acquirer, though we have seen many that have done the opposite this year.


I know that many of the top bosses feel stocks have run too much, and that the targets are no longer attractive. But, in each of the above cases, the stocks of the targets had appreciated or the prices had risen in the private markets. What was needed was growth in institutions that were flagging -- as is currently the case with Amgen. Over the years, this company has fallen behind rivals Celgene (CELG), Gilead (GILD) and Biogen (BIIB), all of which have been extremely acquisitive. In some cases, they had been criticized for spending too much on what turned out to be -- as in the case with Gilead and Pharmasset -- a brilliant acquisition.


Let Amgen's lesson be an inspiration to all management teams. It is so clear that, if the acquirer had found the right price, its stock would have risen greatly today. If you don't have growth, you can buy it -- and, as we saw with Conagra, B&G, Tenet and Actavis, the marker will applaud, not boo, your efforts.

 

cramer

 


Jim Cramer is a co-founder of TheStreet and contributes daily market commentary to the financial news network's sites. Follow his trades for Action Alerts PLUS, which Cramer co-manages as a charitable trust and had no positions in stocks mentioned.

 

 

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43Comments
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Gee Cramer mergers are really bad right now for two reasons

 

1) Stock prices are way way too high at 30-40 P/E ratios for anyone in there right mind to merge companies considering the economic collapse coming by Sept 13 2015.

 

2) mergers make money by firing half the workers of both companies as they are duplicated and not needed. which is just what this economy does not need right now.

 

Repeat after me Mergers are bad bad bad bad

Jul 1, 2013 11:25AM
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I don't mind hanging around a pool for $1.60p/h...Do you have a wet Bar and a Keurig machine ??

Do you have a nice looking wife or daughter over 30...And do you go away to work ??

Jul 1, 2013 10:12AM
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Wonder if Bernie can drive it up 200 today?
Jul 1, 2013 10:40AM
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One of the reasons for lack of M&A activity is that major companies are still in the midst of trimming away any fat and cutting expenses to meet earnings expectations.  For the most part, companies that are in this mindset aren't going to be doing any major deals. 

Take FedEx for example, they've come up with a $1.5 billion cost cutting plan that involves laying off and/or buying out a couple of thousand employees.  They're also in the process of cutting back on some of their capacity and upgrading some of their planes and trucks to more fuel efficient models, but they're doing it slowly, and not spending a boatload on capital expenditures all at once.  At the same time, they've lowered their earnings forecasts for the next few quarters.   This is a very successful company with a huge market share and a solid balance sheet with plenty of cash on hand.  But they aren't doing any big deals, primarily because the rewards just aren't enough to justify the risks.
Jul 1, 2013 10:37AM
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You are forgetting or not considering the "CGT Effect" ? Where the Scumbags and Manipulators are beaten back and submissive to the whims of "one of our own".

 

"200 onward and upward"...Shall be our Battle Cry.

Jul 1, 2013 10:26AM
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We opened higher this morning...First day of the 3rd quarter and we are up about 165 points on the Dow....Its very early though, volume is very low down here....Just saying, don't want to spoil anyone's hopes but we've seen this picture a lot lately....Lets see what happens the next couple of hours and remain cautiously optimistic...Remember, because we are up doesn't mean manipulators have left the building...More later.
Jul 1, 2013 10:22AM
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Now, I've got another dilemma....A " disparate corporate culture "..Oh, well..

 

Oink, oink....Swabby. 

Jul 1, 2013 12:11PM
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Garden and yardwork to be done...

Ciao.

Jul 1, 2013 11:19AM
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Nothing like living high on the hog...

Don't forget the Lipstick..

And for God's sake, don't try and teach them to sing.

Jul 1, 2013 11:13AM
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Ahhh M&A,

Many Companies are sitting on massive amounts of cash..

Some are increasing dividends others are running buybacks on the stock.

Mergers and acquisitions are a way to to thwart competition...Or

To get into a comparable business that compliments the bottom line, without the R&D or layouts for new start-up locations...They should already be in place and near profitbility, if not.

Combining joint operations also serves as a way to eliminate redundancy, cut more costs or people.

 

Some companies have done this well, others have failed at what they want to accomplish.

So many are taking a "critical eye" towards laying out more then what another might really be worth.

Hence others are increasing their values by the former, settling for buybacks or enticing their shareholders...To help revalue their company.

Jul 1, 2013 9:59AM
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It think many managers just want to find an obscure corner and just manage. And with the future abounding with so much debt and continued money printing can you blame them.  It is getting so silly at this point one can't even think of the joke.  How much and how long can this debting go on? Psychology says folks will one day lose confidence that central banking has an answer.  I think we are getting very close to that point now.
Jul 1, 2013 10:54AM
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Doda....Just clearing out the Whiskey from last night...Had company.

Coffee, Apple juice and smokes...Think it is affecting my brain this morning.

Jul 1, 2013 10:47AM
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Okay the best I can come up with on "putative buyers" is:

puta...which I think means whore.

tive...maybe a version of Teva for Teva Pharmacueticals or "drugs"

And buyers could mean "street talk" (Cramers Domain) for "Johns.."

So I come up with this code talk:

"Johns that are out looking for drugged-up whores."

Is that Spanish fairly close...Fatty ?

Jul 1, 2013 1:57PM
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Again, remain cautiously, at 1345 hrs they called for the first wave of selling so, good bye 165 points, hello 120 points....Its not as easy as it may seem; manipulators doing their best to try to bring this market down....Oh well, its not like we don't see this just about every day...More later.
Jul 1, 2013 12:10PM
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Ahhh for the non-believers; Gold was up this morning..

Some Funds up 3.5%

Our miners up 2%...

Granted we have further to recover, but we are not scared or in a hurry..

Jul 1, 2013 12:06PM
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21 year old girls, don't have a clue of what they want...Steve.
Jul 1, 2013 12:04PM
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Regal....After a few weeks as your pool boy/man..

You will have to ask the wife and daughter the same question..

I'm not black nor gay, but am old, like fine wine...No drugs here.

So let's just move on, from the subject at hand.

Jul 1, 2013 10:17AM
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I am still mulling over and wondering what a " putative buyer " is ??

If I can ever figure it out, maybe I will stop back and tell the World.

 

In the meantime Go ConAgra(CAG) GO....!!!

Jul 1, 2013 4:55PM
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Its good the market closes at 1600 hrs as opposed to 1630 hrs, if that was the case we may have ended the day in the red....We understand it is hard to believe but, that's life on Wall Street....Cheaters will always be cheaters and will never go away...Finishing up 65 points is not bad at all but, when we were up 165, it takes something away, don't you agree? Oh well, like we say all the time, when crooks are not afraid of getting caught, they will keep cheating their hearts out...We will see soon enough if they will continue their manipulating in the morning.
Jul 1, 2013 12:58PM
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What would predicate the actual need to merge, Jim? Effort? The idea of merging put two components under one roof for progressive purpose. 100% of today's entities are cardboard cut-out platforms that do law, accounting, finance, politics and are administratively led. They aren't companies at all. These inherited or flea-bag entities (no assets, all drama, just like a trailer park trailer). We aren't going in a good direction, Jim. When the primary objective on Day One of the 3rd Quarter in a lackluster year that is only phony Fed funded to-date, is to make sure the Dow is over 15,000 again... then we are truly screwed.
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