Dividends and sexy but terrible M&A

The nature of a dividend company is the ongoing profitability of its operations and the margins to continually turn profits to pay dividends. As investors we like that, but management every once in a while will be tempted and offered companies to invest in for a number of reasons. The mergers and acquisitions department of the investment banks make their money from bringing companies together, dividing them up and continuing on. In some cases, the process can be very good for investors and the M & A group; in other cases there are busts. It is important to understand the people who  made the decision in both cases believed they were doing the right thing for their companies.

In a recent article by  Eric Reguly, he asked was were the worst acquisitions of all time?

Mr. Reguly wrote Time Warner purchase of AOL at the start of the internet revolution – that is when people were measuring profitability by number of members, not whether those members actually bought something. Time bought AOL and then essentially wrote off $200 billion of wealth. Not to be outdone Microsoft lost money on Nokia; Google lost money on Motorola; and Sprint lost money on Nextel.

The seemingly next candidate is the company behind Bayer aspirin, Bayer chemical which has been operating for over 155 years most of those years paying dividends, bought Monsanto. At first it seemed to be a good fit. One of Monsanto’s product is called Roundup which kills weeds. It is linked to possible cancer by people who have used it for years. The linkage has produced lawsuits by the buckets in the US and something will be done to break up the Bayer company.

Someone from the executive suite to the investment advisors to the law departments on both sides missed the affect of the Roundup lawsuits and Bayer stock is fallen 50% since the merger. Will there be new people in the executive suites? will the company be broken up? how does the company put the bad assets into a separate limited liability company and walk away from the lawsuits?

Linking to dividend paying stocks, the ability to make profits means the executive suite must say no most of the time. Many years ago working for a company which was in business for over 150 years but did not capitalize on many of its assets however it did pay a dividend every year. Eventually the company was sold to a larger one which could and has taken advantage of its great assets. The larger company continues to pay dividends. There ate balancing acts but saying no means less money is lost.

There are more questions than answers, till the next time – to raising questions.



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