This sheet of paper was provided at of the Ben Graham Centre’s 2017 Value Investing Conference that I attended last week. Tony Fell, the retired Chairman of RBC Capital Markets & Former CEO, used it during his speech. He was with RBC Capital Markets and its predecessor for 48 years. We often hear and see that M&A is not as successful as it should. We hear that’s it’s the culture or this or that for the main cause of failure. The list below is brief and useful. Here are the major causes of failed acquisitions and how to avoid them. I particularly like point #3 and #12.
Start off by reminding yourself that fully 2/3 of acquisitions do not work out and actually destroy shareholder value. The odds are two-thirds stacked against you from the get go.
Always remember – the best deal you do in your career is often the one you don’t do.
Always remember the buyer needs a thousand eyes – the seller only needs one.
Beware so-called major transformational mergers or acquisitions – they usually blow up and many have been catastrophic.
In any takeover usually best to be the seller and get a good premium.
Synergies are often significantly over-estimated and take longer to achieve than forecast.
Beware of the auction process – and don’t bid against yourself
Hold your ego in check, don’t get caught up in the euphoria of an acquisition and pay too much. When you pay too much, your returns may be terrible and your may be faced with substantial write-offs.
Beware poor, or incomplete acquisition due diligence. Nothing worse than major operational or financial surprises after you buy a company.
Calculate earnings accretion or dilution based on constant leverage ratio. Accretion due to increased leverage is not accretion.
Beware of potential clashes in corporate culture of two merging companies.
Remember that the vision of the acquisition is great but execution is where it’s at. It’s one thing to acquire a company, it’s quite another to integrate it into your own business and run it. Vision without execution is hallucination.
No acquisition is make or break. There is always another train.
On any acquisition don’t increase leverage beyond a very prudent level. Finance with equity.
Beware international acquisitions. Foreign markets are often more competitive than Canadian markets with lower margins. Don’t expand beyond your ability to manage tightly.
Notwithstanding the above perhaps 10%-20% of acquisitions are outstanding successes.
I don’t know whom to give the credits to for this chart and it’s getting passed around all over the Internet. The chart includes current legend and investors who are no longer among us.
There’s a name at the bottom right that I’ve never seen before, Philip Carret. I had to look him up and it turned out he was the founder of one of the country’s first mutual funds and a legendary investor who swapped investment ideas with Warren E. Buffett’s father half a century ago. He died at the age of 101. He was known as a longtime proponent of the ”value” style of investing: buying shares of companies with steadily growing earnings, strong balance sheets and committed managers who themselves owned a hefty stake in the company, and then holding onto those investments for many years. According to his obituary he scoffed at the tendency of many younger mutual fund managers to hold a stock for weeks, if not days, which he called ”the pinnacle of stupidity.”
Above we present two views from the same vantage point overlooking the Pudong District in the city of Shanghai – one from 1985 and one from today. The city itself is the home of the world’s newest (and some say grandest) Disneyland. Depicted in the picture is Pudong – literally “The East Bank of the Huangpu River” sitting across from Shanghai’s Old City. The area was originally farmland and only slowly developed, with warehouses and wharves near the shore administered by the districts of Puxi on the west bank. Today, in the bottom picture, note the district packed with skyscrapers, including the iconic Oriental Pearl TV Tower, seen on the left.
Pudong, while today the most populous district in Shanghai with more than five million inhabitants (one-quarter of the population of Shanghai), is still one of its fastest growing. By some accounts, largely due to immigration from other parts of China, Pudong’s population is growing more than 10% annually.
While we consider most domestically domiciled Chinese companies as not yet fully proven through cycles or tested in times of adversity, we believe this could change. We also believe that many Chinese companies are destined to become global players, either now or soon, competing around the world. For these reasons, and as part of our long-term process, we shall keep a watchful eye on the country and its growing number of employee-owned enterprises.
This reminds me a lot of a similar picture that showed Cuba and Singapore at different point in time. The picture is pretty self explanatory. A pure case study of capitalist versus central planning. I wrote a post about it last year here: A Tale Of Two Economies: Singapore And Cuba
With inflation surprisingly low, the Federal Reserve still raised interest rate this week. It has been almost a decade since the last rate hike. They must be confident that the U.S. economy is stronger than it looks. While on the topic of inflation, below are two graphs of interest.
In 1974, the economist Herbert Stein, then a top adviser to President Richard Nixon, called inflation “a Hydra-headed monster” that “came in various forms—sometimes led by wages, sometimes by prices, by foods, by oil; sometimes it was domestic and sometimes imported.”
Below is a chart of U.S. inflation since 1775. You will notice that we haven’t suffered a period of deflation since the Federal Reserve was created in 1913. The violent drop and rise in inflation and deflation is also gone.
Apple has a reputation for putting a lot of thoughts in their products to make it the best and as consumer friendly as possible. Everything from the original iMac that came out in 1998. That was the cute transparent computer with a colored handle that took the industry and consumers by storm. This probably doesn’t mean a lot today to the readers, but it was a big deal by then. It just needed one wire to operate (just plug it in) as opposed to the PC that required tons of wires to run. One for the mouse, one for the keyboard, speakers, power etc…Then Apple came out the iPod, iTunes, iPhone, iPad and other innovative products. All Apple products are very well regarded by their users.
However, there’s one thing that Apple does that really annoys their consumers and it’s that frustrating iTunes terms and conditions update that you need to agree to every other week. Once in a while Apple randomly hits you with a nice 40 something pages legal document for you to “read” and agree to (you have the option to have it emailed to you…) I’m not sure what happens if you disagree/decline their terms. I never did because I’m afraid I wouldn’t be able to use my iPad. It’s written by an army of lawyers and it’s really unreadable. Actually that’s a lie because I never read it, so maybe it’s not boring. Am I suppose to send this to my lawyer for him to read? The whole thing is so ridiculous that South Park even made an episode out of it.
Anyway, looks like I’m not alone with that feeling and some people took matters in their own hands. Cartoonist R. Sikoryak published a page by page graphic novel of the terms and conditions featuring Steve Jobs. Definitely not a small task. It seems that each page is dedicated to a real comic artist, which some of them you will recognize from your youth. I really recommend that you go check it out at this tumblr page, iTunes Terms and Conditions: The Graphic Novel.
I added some of their art pieces. All credits to them. Here are the samples:
Low oil price is the one financial headline that doesn’t go away. Some weeks the news focus on Greece, or China, or the U.S. budget but oil is always there. Other days we hear about the Federal Reserve and interest rates but oil is also right there. You can’t go a do without hearing about oil.
Below is an interesting graph provided by the International Energy Agency. It breaks down the average cost of production for the different oil producing countries. Saudi Arabia has the lowest cost per barrel at around ~$20 and the Canadian oil sands is the most expensive to extract at over $70 a barrel. None of this is breaking news. I just like to see in way where it’s comparable among regions.
Below are two tables. One on of the rising demand for oil displayed quarterly and the second one is world supply. You can see that the demand for oil has increased significantly with the drop in oil prices. Demand is also expected to hit 96.8m/bpd by Q4-2016. Now supply has to keep up. Because of low oil prices capital expenditure has been slashed the most in twenty years and is still expected to drop in 2016. That could cause an eventual supply shortage or a “rebalance” from excess oil to not enough oil to meet demand in the future. Oil is a depleting resource so if we don’t actively drill for new sources supplies will decrease. And the current production from oil wells is always declining due to natural depletion. That means a well produce less oil year after year and you need to keep spending money to find oil. So there’s a lot of production/supply constrain. First you need a lot of money, then you need to find oil, then you need to drill, maybe you find some, maybe you won’t, if you need do you need to extract it and find a way to ship it out and refine it. There are other intermediaries between the well and your gas tank. Plus you need to navigate the fragile regulatory and political environment that can change at any time. It seems that the cure for low oil prices is low prices. According to the IEA, demand is expected to exceed supply in Q3-2016. If the market is under supplied and demand is increasing, well we have a situation where oil prices have one way to go.
My point is you can’t get too comfortable with low oil prices. We hear so much about low oil prices that we feel like it’s the “new normal”, that its there to stay forever. Remember that not too long ago the consensus was the high oil prices weren’t high enough. Oil prices can turn around and shoot up like a rocket just like it came crashing down like a house of card.
Except for the U.S., the order doesn’t exactly follow the size of their economy. The reason China is not up there is because there’s still work to do to develop their capital market, which is relatively young.
You are planning a trip around the world, don’t forget your beer guide. Thanks to Vinepair for putting together this really cool useful map. The ranking is base on market share. Usually a country has one of two main beers, also the country unofficial symbol.
Regarding Canada, I don’t have the official stats in front of me but I’m pretty sure Coors Light and Molson Canadian sell more than Budweiser. Maybe ten years Budweiser was the king of beer in Canada and I believe their market share has shrunk since. If Budweiser is the #1 beer in Canada, then it’s pretty sad that a foreign company is the highest selling beer. Usually a country has its own beer and is proud of it. When you go to a new country, you ask for the “beer”. On the other hand, there’s a lot of excellent craft beer gaining ground and popularity. Great stuff!