These were among the points Taulli made in an investing chat presented Aug. 7 by BusinessWeek Online on America Online, in the course of replying to questions from the audience and from Jack Dierdorff and Karyn McCormack of BW Online. Following are edited excerpts from this chat. A full transcript is available from BusinessWeek Online on AOL at keyword: BW Talk.
Q: Have mergers and acquisitions picked up momentum -- and influence on the market?
A: I've put together a site (Mergerforum.com), and in the past few months, the traffic has increased significantly. I've been contacted by companies, investment bankers, and individual investors, so that points to the M&A market's coming back. It does help to see deals like the PeopleSoft (PSFT
) deal [for J.D. Edwards] and the hostile takeover [attempt by Oracle (ORCL
) of PeopleSoft] on top of it.
The valuations right now are attractive, and the cost of capital is low, which makes it easy to justify making a purchase. In terms of equities, a healthy M&A market is a positive. It's a sign that we've reached some bottom in valuations.
Q: Is there a big telecom merger coming up?
A: If I said, I would be put in prison for insider information. I think it's very interesting that [Warren] Buffett invested in Level 3 (LVLT
). To me, that's a signal that there's value in telecom. We've seen some smaller acquisitions in the last few months, but we could definitely see some fireworks in the next year or so with major players, both domestic and foreign, picking up the cheap assets in the U.S.
I would focus on companies that are turning the corner as targets and ones that have some money in the bank -- also the ones lower in market cap (under $250 million).
Q: How about the financials? Will Bank One (ONE
) be a player this year?
A: I think we'll probably see more M&A in the financial space. We've already seen that with some of the credit-card divisions being spun off. Citigroup (C
) recently bought the credit-card division of Sears (S
). We'll probably see more deals of that nature.
We'll probably see buyouts of brokerage firms -- Ameritrade (AMTD
)is a possibility, and Bank One will probably also be a player in the next 12 months. We'll see some consolidation in the sector. We could also see consolidation in the online sector, such as e-Loan (EELN
Q: Do you think Bristol-Myers Squibb (BMY
) will be bought out by a large pharma company?
A: The big pharma industry is a global industry that lives and dies by blockbuster drugs, and it's extremely difficult for any pharmaceutical companies to develop and commercialize a big blockbuster drug. It's like Hollywood -- it's something that's not easy to institutionalize in a company. So it makes sense to pursue an M&A strategy to buy patents and pipelines. BMY does look like an attractive candidate for a buyout at some point, and for me it's not a matter of if, but of when.
Q: Have you examined how stockholders make out, post-merger? Who does better -- holders of the hunter or the prey?
A: I currently teach M&A and have looked at a variety of academic studies that have looked at that question you just raised. Generally, the target shareholder does better in cashout-type acquisitions -- that is, the buyer uses cash, and the seller takes that cash and makes a hefty profit. A lot of studies show that the buyer, in the long run, ends up overpaying for acquisitions.
On the other hand, if you look at an M&A event where there isn't cash, but a stock-for-stock swap, the result is that the combined entity tends to underperform whatever benchmark you look at. The problem with major M&As is bringing together the cultures and managements of the two companies. Look at AOL and Time Warner (AOL
Keep in mind, though, that these are statistics.... You don't want to look at the statistics -- you want to make a deal because the deal makes sense.
Q: What do you think about AOL?
A: After I just called AOL Time Warner one of the worst mergers ever, I do think that the company is in capable hands and is doing a very good job in dealing with integration and stabilizing the business. Considering the immense assets the company has, I think it's a long-term buy. I do think that we'll see that fuzzy thing called synergy take effect, and at some point three or four years down the road I could almost see a headline on the cover of BusinessWeek saying that AOL Time Warner did something right.
Q: Do you see any more deals among Internet outfits?
A: I think we'll see quick consolidation in the search space. I think that, in the next year, FindWhat.com (FWHT
), LookSmart.com (LOOK
), and Ask Jeeves (ASKJ
) will be bought out. The search industry is growing at an incredible rate and appears to be a highly strategic element to the business.
Other companies outside of search are also candidates for acquisition. I mentioned e-Loan -- there are many of these e-commerce-type companies that would be attractive to the brick and mortars to add growth to their operations. It's funny -- we talked years ago about the Internet's impact on the brick and mortars, and that may finally be happening today through M&A.
Q: Do you see consolidation within the large brokerage houses?
A: I think that we'll probably see a couple of big deals in the online brokerage area. Ameritrade is a big company. I don't see a company like Schwab (SCH
)selling out, probably because the founder does not want to sell. I would focus on those houses that don't have a big founder calling the shots. Another one could be a firm like e*Trade (ET
), which has done a good job of creating a diversified online financial institution and could be very attractive to potential buyers.
Q: What industries should we watching most closely for possible new merger moves?
A: I think the key area at this point is tech. It's the sector that was hit the hardest in the bear market, yet many of these companies have large amounts of cash, more streamlined operations, and are more profitable. There's this drive in big companies like Microsoft (MSFT
), Intel (INTC
), and Cisco (CSCO
) to make M&As happen.
This M&A trend in tech will not be just a short-term trend. Many small- and microcap tech companies are ripe to be acquired and likely will be so in the next couple of years.