HP’s acquisition of software company Autonomy created an $8.8 billion charge due to supposed accounting improprieties. Now HP has just one more notch in its bedpost of bad deals, after you tally up the likes of 3Com, Palm, EDS and Compaq. While HP shareholders should ban the company from ever making another acquisition, there are many other M&A sinners from the past five to 10 years.
The list of awful mergers offers keen insight into not marrying troubled assets and avoiding difficult integrations. This is not just a lesson in technology mergers. For our analysis, we screened out many questionable mergers and acquisitions that made little sense or have yet to pay off, if the share price has not suffered. That leaves deals like Medco, XTO, Sun Microsystems, Cadbury and many other financial mergers off the list for now.
Here are 10 of the worst large mergers of the past decade.
Advanced Micro Devices Inc. (NYSE: AMD) is a train that has jumped off the tracks. Poor leadership and being outpaced by Intel Corp. (NASDAQ: INTC) at every step has been painful. Acquiring graphics chip maker ATI did nothing for AMD, and the company has been in a steady state of leadership change and decline almost ever since. The purchase price was a whopping $5.4 billion back in 2006, but there were immediately talks that AMD really wanted to acquire ATI rival NVIDIA Corp. (NASDAQ: NVDA). AMD shares were around $20 in mid-2006, and they are now under $2.00. Sadly, AMD’s market value is only about $1.3 billion to boot. AMD has been unable to win in processors from its own business, nor has its graphics chip business retaken its old power. With no real CEO today, with AMD’s current value being a fraction of what it paid for ATI and with a share price performance that is pathetic, is there any way that anyone at AMD can argue that this was a good merger?
Alcatel-Lucent S.A. (NYSE: ALU) has been a total disaster of a merger. France’s Alcatel acquired Lucent, and things have just slid lower and lower. If the company wants to deny this, we would merely point out that the stock is now under $1.00, and things are so bad that we recently included it as a likely member of our “future penny stocks” for investors. Merging Alcatel and Lucent was supposed to create a technology and networking gear supermarket for telecom providers, governments and other major enterprisewide communication clients. Now the company has fired and fired and restructured and restructured into a focus on what looks like Next-Gen equipment. We’ll see. We might sarcastically wonder if Next-Gen is already on the way out if Alcatel-Lucent wants to focus on it. Neither Alcatel’s Serge Tchuruk nor Lucent’s Pat Russo could dominate the competition at the start of this odd-ball merger, and no one has been able to since. Shares are down about 90% since the merger, and this combined entity did not even capitalize off of its massive Bell Labs patent portfolio, which was deemed to be worth billions at the time of the merger.
Alpha Natural Resources Inc. (NYSE: ANR) announced its plan to buy Massey Energy at the end of January of 2011. Massey was a troubled asset after its mine disaster killed 29 workers in 2010. The deal was a cash and stock buyout, which ultimately was worth some $8.5 billion combined when it was announced. This merger gave Alpha 54% of the company and Massey 46% of the company. Apparently the diversification of operations in metallurgical coal and the move to become the number two coal company in America did not protect the company from the anti-coal movement around the nation. With a second term of President Obama, the merger may have little to no value ahead. The Alpha Natural Resources share price was above $50 when this deal was announced. Shares are down to around $7 now, and the company is expected to lose money in 2012 and in 2013 with sales expected to decline almost 20% next year. The company took goodwill impairment and asset impairment and restructuring charges of $1.5 billion and $1.0 billion, respectively, earlier in 2012. With a value of about $1.6 billion today, can this company claim that the merger really did anything other than help assure that it will not have to pay income tax for years?
Bank of America Corp. (NYSE: BAC) may have won when it acquired Merrill Lynch, but by acquiring Countrywide it shot itself in the foot. This awful Countrywide buyout is a merger that we still maintain was coerced rather than 100% voluntary, but either way this destroyed Bank of America, relative to peers like Wells Fargo & Co. (NYSE: WFC) and J.P. Morgan Chase & Co. (NYSE: JPM). Bank of America is now assured to have untold exposure to the mortgage mess from before, during and after the last recession for years and years. Most of the securities suits tied to improper mortgages are tied directly to or generally overlap with that Countrywide purchase. Angelo Mozilo is now considered one of the men that caused the Great Recession for endless lending to homebuyers out in California and other markets that reached unsustainable prices, financed by very questionable mortgages. Ken Lewis could have found a much cheaper way for Bank of America shareholders to find out about world-class sun tans other than by signing on with Angelo Mozilo. There were many bad mergers in high finance, but the Countrywide-Bank of America merger was a marriage brokered in hell. Brian Moynihan has promised no more large acquisitions, but Bank of America’s prominence now lags Chase and Wells Fargo.
Boston Scientific Corp. (NYSE: BSX) paid more than $27 billion to acquire Guidant in 2006. This was supposed to be the end-all, be-all deal for the company. They even had to pay Johnson & Johnson (NYSE: JNJ) money to break up a prior merger offer after a serious bidding war. After years of mismanagement, management shake-ups, product follies and restructurings, all that Boston Scientific has to show for the huge undertaking is a group of very unhappy and depressed shareholders. This stock was $35 at the start of 2005 and its peak was around $45 shortly before that. Its shares slid long before the Great Recession to less than $15 in 2008 as the problems were mounting. Now Boston Scientific is close to a $5 stock with only a $7.2 billion market value, and it carries more debt than it has in physical assets. It has written down billions and billions worth of goodwill and intangibles, and it remains a mystery how this company can rekindle any interest as there as sales peaked in prior years and are now on the decline. Guidant was a vanity acquisition which was supposed to generate double-digit sales growth. The only annualized double-digit growth has been realized by short sellers here.
Microsoft Corp. (NASDAQ: MSFT) really was supposed to get a lot more out of its aQuantive acquisition from 2007. On the surface it seemed like a great fit. In the summer of 2012 Microsoft announced that it was taking a $6.2 billion goodwill write-down tied mostly to this $6.3 billion merger. Our understanding was that this helped to migrate much of the digital efforts, but Microsoft’s own words were as follows: “Bing search share in the U.S. has been increasing, revenue per search has been growing, MSN is the No. 1 portal in 29 markets worldwide and the company’s partnership with Yahoo! Inc. (NASDAQ: YHOO) has continued to expand geographically. While the Online Services Division business has been improving, the company’s expectations for future growth and profitability are lower than previous estimates.” The deal was done in cash, so that noncash accounting charge of $6.2 billion versus the $6.3 billion price hurt by more than $1 billion per year. Fortunately Microsoft has a fortress balance sheet and this charge was hardly noticed at all by investors. We might have overlooked this, but Microsoft’s own words when it disclosed this write-down have left many wondering if Microsoft should jettison all efforts outside of its core software business.
Sears Holdings Corp. (NASDAQ: SHLD) is the amalgamation of two troubled retailers after Eddie Lampert married Sears and Kmart in 2005. The stock originally rose and was touted routinely by Jim Cramer and other market pundits. That was before the Great Recession. Now the company is still just two big and troubled retailers. Sales have been in steady decline and are expected to remain that way. It is losing money and analysts expect losses to continue this year and next. Jim Cramer and almost everyone else have stopped being bullish here. Is Sears a hedge fund masquerading as a retailer under Eddie Lampert, or is it just a retailer that is down and out? Whatever happened to the endless billions of dollars that could have been unlocked in the land values? Efforts taken to unlock value have all been short-lived, as this is back to being a stock under $50. After waves and waves of store closures, and after goodwill and intangible values have been written down, no one cares any longer. With a market cap of $5.3 billion, it is a mystery as to why Lampert has not raised funds from a group that understands retail and taken this private to avoid the embarrassment.
Sprint Nextel Corp. (NYSE: S) was originally just Sprint and Nextel before the late 2004 deal was announced. The deal did not formally close until August of 2005. If you adjust for payouts and the like, Sprint shares were around $22 before the merger and were around $23 when the deal closed in August 2005. This stock was dead money for years, and then by early 2008 it had fallen to less than $10 per share. At the peak of the Great Recession, shares of Sprint Nextel were down to $2. Almost the same levels were seen in early 2012. These two cellular carriers had integration issues with different networks and technologies, and management has changed multiple times since. A massive write-down of close to $30 billion in 2008, about 85% of the implied purchase price, officially sent this merger down into the dregs of M&A over the past decade. Sprint Nextel is now going to be relegated to a Softbank USA-Communications tracking stock in this latest majority acquisition. The new management team cannot be blamed for the sins of years ago, but Sprint still sits under $6 per share and is worth only a fraction of its premerger price.
Symantec Corp. (NASDAQ: SYMC) seemed to have a match made in heaven when it acquired Veritas Software. This married a storage giant right into a security giant. The problem is that this merger destroyed what had been a massive growth engine when Symantec shares already had started to falter. These were both big growth sectors at the time of the merger, but the shares never recovered, and that was so long before the Great Recession came along. Symantec’s stock price was close to $27.00 at the time the deal was announced, and that valued the Veritas buyout at about $13.5 billion. As it turns out, the surviving company’s share price also slid after the merger closed. Since the end of 2005, investors would have done well had they sold every time Symantec hit $20 and repurchased the stock each time it got close to $15 again. Management has changed at the top, but no one has made this combined company work and sales growth has dribbled into an anemic position, with an expectation that anemic growth remains.
The Wendy’s Company (NASDAQ: WEN) made a monumental error by becoming Wendy’s/Arby’s. Arby’s went to Triarc in 2005 and then became Wendy’s/Arby’s in 2008. Maybe the Great Recession only made matters worse for the timing of this merger, but these two companies were never able to fully integrate. During this would-be restructuring period after the merger, McDonald’s Corp. (NYSE: MCD) dominated the the fast-food sector. By June of 2011, Wendy’s threw in the towel by selling out of most of the Arby’s stake. Wendy’s has just been dead money ever since. With a market value of just over $1.75 billion today, investors have to be wondering if Wendy’s can ever recapture its former glory days. To show just how bad things are valued here, McDonald’s trades at roughly three times sales and Wendy’s trades at about 0.7 times sales. At the Arby’s exit, we showed just how complicated and convoluted this deal was.
JON C. OGG
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