Ravi Madhavan's A&D Blog

Holiday week roundup

An NYT/ Breakingviews story on older tech companies and their acquisitions argues that it is a hazardous approach. Excerpt:

Acquisitions, combined with cost-cutting, tend to be a popular way of trying to rejuvenate. It’s often a losing proposition, though. Control premiums and purchase accounting typically muddle matters. Tech takeovers also have a habit of failing. H.P. alone has written down about $18 billion worth of M.&A .since 2011....Slowing the aging process may prove irresistible to technology behemoths, but it would come at a hefty cost.

Also this week, an interesting instance of crossed communication: Apple saying that it acquired Broadmap, but then Broadmap denying that it has been sold - WSJ story here. It appears eventually that Apple may have bought the technology but that the company continues to exist, perhaps licensing the technology back from Apple - AllThingsD update here.

In the current M&A environment, dealmakers are no longer getting the largest bonuses on Wall Street, according to this NYT DealBook story.

A car rental deal - or is it "on demand mobility" deal?

Avis is buying Zipcar for $500M. NYT DealBook report here. Zipcar investor relations Events page has the webcast. On the same page, there is a link to an earlier company presentation (at the JP Morgan Small/ Midcap conference, Nov 29, 2012) that has a nice overview of Zipcar's business model. The "on demand mobility" concept is quite intriguing - as a "new model of growth" in urban mobility. 

Incidentally, Zipcar's founder Robin Chase had moved on, even earlier, to set up a peer-to-peer car sharing system called Buzzcars - in France. Here's an Inc. story about that.

GE making a move in jet engines...

GE is reported to be close to buying Italian company Avio, which makes propulsion components and systems, including parts for some of GE's jet engines. I see this as part of an inevitable reconfiguration of the aerospace sector as it adjusts to China's entry into commercial aircraft. 

One take on Delta/ Virgin Atlantic

WSJ's Middle Seat has a good analysis of what the Delta/ Virgin Atlantic deal means for passengers. The bottom line: "In the end, consumers will find fewer airline choices and higher fares, but more stable carriers with bigger networks that will be able to invest in a better product and new planes, rather than constantly struggle to stay afloat." A good outcome in my book! 

I saw this morning that Delta's Richard Anderson was scheduled to be on CNBC. That should have been an interesting interview, I hope they post the video at some point. Delta seems to be doing some interesting things under his leadership.

Apple/ Netflix rumor surfaces again

Coinciding with Apple CEO Tim Cook's interview on Rock Center last night, and coverage of him in Business Week also yesterday, people are kicking around the Apple/ Netflix rumor again - it came up on CNBC's Sqawk Box this morning. (This is a perennial idea when my students work on their prospective deal pitches.) On the Rock Center interview, Tim Cook expressed "intense interest" in the TV business, which he says has been left behind; it's hard to avoid the implication that something is in the works.

On the Netflix front, I don't know...but I understand the reasons why it's an interesting prospect. It's easy to dismiss the idea using a bald "Apple is a hardware company" logic, but Apple's "music related products and services" line (which includes revenue from iTunes Store sales, iBookstore sales and the App Store, effectively "content") grew 35% in 2012. Netflix overtook Apple in online movies this year, and this week tied up an exclusive TV distribution deal with Disney. 

BCG's Medtech M&A report

Given yesterday's announcement of the Baxter/ Gambro deal, this BCG report on Medtech (medical technologies) M&A is worth a look.

Delta/ Virgin Atlantic

Quite an active deal Monday today, including news about a buyout rumor at Dell, Saputo buying Dean Foods' Morningstar unit, Exquifax buying CSC's credit services unit, and ADM raising its bid for Graincorp of Australia (NYT DealBook page here).

One possible deal that I find very interesting is that of Delta potentially buying the 49% stake of Virgin Atlantic that Singapore Airlines currently owns. The investment thesis appears to be that Delta will then be able to access Virgin Atlantic's Heathrow landing slots, as well as create value for Virgin Atlantic by incorporating it into the SkyTeam alliance and by providing financial support to Virgin Atlantic, widely considered to offer a fresh, innovative, flying experience . On a recent trip down under, I noticed that Delta is a codeshare partner with Virgin Australia, so there's probably some positive history with the Virgin Group. 

On the topic of financial performance, Delta seems to be doing slightly better than its rivals, while trying some interesting things in terms of strategy - e.g., holding off on new planes (operating slightly older planes with refurbished interiors), in the process reclaiming some operational space from regional operators (by using 717s recently acquired from Southwest Airlines instead of regional jets), and vertically integrating into jet fuel (strictly speaking, engaging in tapered vertical integration).

I wonder if Virgin America would pose a small complication - as a domestic rival of Delta's (which problem Singapore Airlines did not have), but not directly owned by Virgin Atlantic.

A deal in the "Restoration economy"

On Monday, the announcement came that Waste Connections was buying R360 (NYT story here). R360 is in an interesting space, what we might call the "restoration economy:" the business of cleaning up at oil and gas drilling sites. Companies like R360 help to clean upcontaminated land, reclaim oil from storage tanks, etc. I find myself intrigued by the restoration economy - as the world goes through the turbocharged industrialization that we're in the midst of, there's a lot of associated cleanup and restoration to be done, with some substantial corporations active in the area (such as Clean Harbors).  

EADS/ BAe talks

The ongoing talks between EADS (parent of Airbus) and BAe Systems represent an interesting development - financial markets have reacted coolly. It will be a complicated transaction, if it goes forward - both companies have heavy government ownership, and of course, the business is interprenetrated with security concerns and anti-trust issues. The goals would appear to be cost reduction, diversification (military and commercial) and increased scale (will be larger than Boeing). 

Given some research work I'm currently doing - into the implications of China's entry into the aerospace sector - I'm wondering how much the talks are driven by the possible end of the Boeing-Airbus duopoly. If China successfully establishes itself as a contender in large commercial aircraft, it will change the dynamics of the industry - suggesting the imperatives of cost reduction, diversification and scale. 

This one will be very interesting to follow.

New Academic Year

Pitt's 12-13 academic year is off the ground today, first day of classes. Looks like it was a bit of a Merger Monday as well, what with deals like Hertz/ DollarThrifty, M&T Bank/ Hudson City Bancorp, IBM/ Kenexa and IAC/ About in the news (NYT DealBook coverage here.) 

Last week, FT.com ran a story about Chinese acquisitions in the US (near record levels). 

This WSJ story illustrates how acquisitions often increase market (and pricing) power - this time in the context of hospitals buying physician practices, with increased medical bills being one outcome.