On Jan. 28, Procter and Gamble agreed to pay $52 billion to acquire Gillette. Days later, SBC Communications Corp. bought AT&T for $16 billion.
The track record of merger-and-acquisition activity on Wall Street leaves a lot to be desired. Most of the mergers involving large operations fail to generate anywhere near the returns management promises.
But as soon as I heard about the P&G deal, I thought a lot of things make sense here. First of all, neither one of these stocks can be put into the high-flier category. The expectations of these types of investors are often lower than people involved with tech companies; therefore, management will be given a little more rope to pull this off.
Another positive is the two companies are in the same economic sector, but there are few overlapping product lines. Both companies are among the world’s best in marketing, and I can see at least a few billion in savings from this combination alone.
The last thing I like about it is the price. P&G paid an 18-percent premium for Gillette, but that is a number that can be hurdled in less than three years. After that, the combined firm should be in quite a powerful position.
The SBC deal is much smaller, but more interesting from a historical perspective. AT&T used to be SBC’s parent. Today, SBC has a market value of $80 billion and AT&T is worth $15 billion. Until 1982, all phone communications were controlled by AT&T.
The federal government changed the laws and MCI came on the scene as the first alternative to Ma Bell. AT&T was split up in the early 1990s, creating what are now called the Baby Bells. SBC is such a bell.
In 1996, AT&T spun off Lucent Technologies Inc. and began building its own wireless carrier. AT&T Wireless experienced some success and was recently bought out by SBC for $40 billion.
Along the way, SBC also bought up two other Baby Bells, including Ameritech, which was a combination of five companies including Indiana Bell. Now, if SBC goes out and buys LU, then the old AT&T will be almost completely together again!
As far as the deal itself, SBC isn’t paying too much for a group of customers who must be extremely loyal. If they haven’t left AT&T yet, they probably weren’t ever going to leave. On the other hand, SBC is still integrating the wireless acquisition. The $16 billion most likely could have been better spent.
There is a positive, though. Mergers, when done with cash, reduce the supply of stock on the market. Less supply creates the potential for higher prices.
SBC is paying with some cash, and P&G announced a $22 billion stock buyback, so the cash will be introduced throughout the year. The amount of new stock coming to market does not come close to matching the amount being retired in these deals. If other CEOs get the merger bug soon, a fair amount of supply could be reduced soon.
Speaking of the January effect, the markets have been correcting for five weeks. I will wait to redeploy the cash reserves that were raised in mid-December until a clear buy signal is given. I don’t expect to be waiting much longer.
Hauke is a local money manager. His column appears weekly. Views expressed here are the writer’s. Hauke can be reached at 566-2162 or at [email protected]