I ask that in light of the news today that merger-mania is getting even more manic. Specifically, Dow Chemical (DOW) and DuPont (DD) are reportedly looking to tie up in a transaction that could be worth $120 billion or more.
The deal would unite two of the oldest names in American manufacturing, and it’s a response to activist investment pressure from the firms Third Point and Trian. But frankly, I don’t see anything revolutionary or inspiring here.
For starters, both companies have been spinning off divisions, buying other firms, firing workers, and otherwise engaging in a host of financial-engineering transactions for several years. DuPont just unloaded a titanium dioxide pigment business, for instance, while Dow sold some chlorine-focused operations.
|Dow Chemical and DuPont are looking to tie up — is this a case of America playing not to lose?|
Yet their shares haven’t done squat anyway. Dow closed yesterday at roughly the same level it did 10 years ago. DuPont was recently trading for the same price as it did in 1999.
And get this: IF the companies do manage to overcome financial and regulatory obstacles to a deal, guess what they’re going to do afterward? Turn around and break up again – into three business units focused on agricultural chemicals, specialty chemicals, and materials. As a Wall Street Journal writer put it today, the proposed transaction signals that “This is not an America playing to win. It’s an America playing not to lose.”
Then there’s the latest news out of Yahoo (YHOO), the Internet search and advertising firm. The company now says it won’t spin off its Alibaba stake after all. Instead, it plans to spin off every other business except for the Chinese e-commerce business as a new entity.
|“Yahoo: The plan shows that the last few years’ worth of investments haven’t succeeded.”|
The idea is to give shareholders some kind of transaction that results in lower taxes. It’s a response to pressure from activist investment firm Starboard Value LP. But it also shows that the last few years’ worth of investments haven’t succeeded in turning around the Internet company, and that management is basically punting.
I have nothing against strategic transactions that make sense, or rational cost-cutting and investment plans. But you know what I see here? Late-stage/late-cycle behavior by corporate execs and investment bankers who have run out of revolutionary ideas or inspired plans, and who are instead throwing whatever they can against the wall to see what sticks.
That’s my take, but now I’d like to hear yours. Is a Dow-DuPont tie-up, or the latest plan from Yahoo, the kind of thing that will create lasting shareholder wealth? Or are these just financial engineering schemes that are doomed to fail?
Are there any recent mergers that you believe have a solid strategic rationale? Or are these deals another sign the bull market is on its last legs? Use the comment section as your outlet.
Meanwhile, yesterday was a very active day at the Money and Markets website with comments on several topics posted.
Reader Chuck B. weighed in on China’s global ambitions, asking the group: “Would you be surprised if the would-be unidentified purchaser of Fairchild Semiconductor International (FCS) was Chinese? I saw that the flow of capital out of China is booming. Where would it be flowing to except the U.S.?”
Reader Peter W. also shared some thoughts on China’s long-term strategy, saying: “China’s economy is having difficulty, but so are Europe and the U.S. China’s advantage is that they are at war with no one. They will trade with anyone, no sanctions — period.
“The West plans for the next quarter. China plans for the next quarter-century. Thus, it is not important that China’s economy is slipping, but whose economy will survive without a revolution of some type.”
On the topic of government reaction to oil weakness, Reader F.M. said: “Let the free market work. We don’t need the Fed or Capitol Hill to come up with more government aid to the oil patch. Rescind the current laws and allow America to export oil.
“We get a lot of new jobs, cash from other countries for our oil, and a positive trade balance. No more government programs, just free-market solutions.”
As for where the U.S. currency is headed next, Reader $1,000 Gold offered this take: “A stronger dollar is coming, as are higher rates and inflation. We’ve reached full employment, so demand for credit will uptick next year. This will move long-term rates higher and cause the Fed to tighten, all leading to a stronger dollar.”
But Reader Al McN. sounded much less optimistic on the outlook for the U.S.: “Junk bonds are falling from grace, student loans are starting to increase in defaults, and the auto loans are doing likewise. Of course, we all know that corporate debt has gotten out of control. That isn’t a good sign considering the falling commodity markets.”
Thanks for sharing, everyone. I believe China is really hurting here, and that growth is likely far below what the “official” figures show. You can cook GDP data, but you can’t cook the price of iron ore, oil, copper, zinc, aluminum and so on.
As for the U.S. outlook, what can I say? I’m a slave to my indicators, particularly those focused on the credit markets. They are all suggesting rough sledding ahead, just as they did in advance of past periods of market turmoil. So I’m more firmly in Al McN.’s camp than I am in $1,000 Gold’s.
Any ground I didn’t cover yet? Other comments you want to add to this debate? Then don’t hold them in. Post ’em below.
Here come the dividend cuts. Commodities giant Freeport-McMoRan (FCX) said it would scuttle its 20 cent per share annual dividend to save $240 million a year. Oil and gas pipeline giant Kinder Morgan (KMI) slashed its payout yesterday by 75%, to just 50 cents per share on an annual basis, to help offset worries of a credit rating cut.
Time magazine has named its 2015 Person of the Year: German Chancellor Angela Merkel. Editors cited her handling of the Greek debt crisis, the Russian territorial gambits in Ukraine, and the European refugee influx.
Bloomberg has an interesting piece today on how it is consistently costing more to buy protection against stock market declines than it is to speculate on stock market advances, at least in the options market.
The “skew” toward more expensive puts than calls may stem from overall nervousness. But Bloomberg also says it may be banks “hoarding” downside protection in order to fare better in Federal Reserve stress tests.
Do you think Merkel deserved Time’s accolades? What about these dividend cuts — are we going to see even more in the weeks ahead? And how about the fact so many people seem to be making bets on a market collapse? Is that a contrarian buy signal or a reason to be scared stiff? Let me hear your thoughts when you have a minute.
Until next time,
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