Yves here. As readers may know, I started up and ran an M&A department for Sumitomo Bank, then the second biggest bank in the world, at a time when both the M&A market and Japan were hot (as in this looked more sensible at the time than it might with the benefit of hindsight).
Part of my job wound up being protecting the bank (who was lending to these deals) and the clients from doing things that were stupid,. That was an enormously uphill task, since Japan was not, and I assume still is not, a contractual society. It was just about impossible to get domestic Japanese companies to understand that the only thing that mattered was what was in the deal documents, and not all the blather from the seller and his various minions.
But this wasn’t the way to maximize fees, which was something the bank was also keenly interested in. An American client of mine pulled me aside and said, “You have to quit caring that the deals make sense. It puts you at a competitive disadvantage.”
Despite not having the proper attitude, I still managed to boil M&A down to five rules:
1. Control your client
2. Everything can be solved by price
3. Get the buyer’s price expectations up
4. Spend your time on deals that are likely to get done
5. Fees are not negotiable
Microsoft illustrates the real-world fallout of letting corporate executives, either out of desperation or out of finding deal making more fun than the grind of making businesses perform better, follow the siren song of M&A mavens.
By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street.
As the M&A boom in the US explodes from record to record, with one mega-merger succeeding another, Microsoft clarified on Wednesday just how much all this fun costs down the road, in jobs and dollars: relating mostly to its acquisition of Nokia, it announced a second wave of layoffs, write-offs, and shut-downs.
Share repurchases, M&A, layoffs, and cost-cutting are easier to make happen for a CEO than inventing things and boosting sales organically, which is really hard.
Companies call the dizzying costs of acquisitions, paid for with cash and/or stock, “non-cash charges” to make them appear irrelevant. Analysts feed out of their hands and eat it up. To justify acquisitions, CEOs and analysts sprinkle their pronouncements with terms like “efficiencies” and “synergies” that are euphemisms for cost-cutting, destruction of productive capacity, and layoffs.
In September 2013, Microsoft acquired Nokia’s mobile-phone business and patents. Nokia was junk-rated. Its market share was collapsing. It had lost over $4 billion in the prior year. But its marginalized smartphones were using the Windows Phones operating system that no one else of consequence was using. And that was a big deal.
Microsoft paid $7.2 billion. To make the deal sound palatable, it promised $600 million in annual cost savings – the efficiencies and synergies – within 18 months. That was CEO Steve Ballmer’s doing.
In February 2014, Satya Nadella was anointed CEO. On July 17, the meaning of annual cost savings became clear: the company would axe 18,000 people and take a $1.6 billion “non-cash” charge. And in premarket trading after the announcement of the job cuts, shares rose to a 14-year high. Nadella was putting his stamp on the company.
Almost exactly a year later, this Wednesday, he sent an email to employees to “update” them “on decisions impacting our phone business….”
Microsoft would axe another 7,800 people globally, nearly 7% of its already trimmed-down workforce, “primarily in our phone business,” as Nadella wrote. He expected it to happen “over the next several months.”
And a huge pile of money has gone up in smoke:
Today, we announced a fundamental restructuring of our phone business. As a result, the company will take an impairment charge of approximately $7.6 billion related to assets associated with the acquisition of the Nokia Devices and Services business in addition to a restructuring charge of approximately $750 million to $850 million.
In an email to employees in late June, quoted by the New York Times, Nadella tried to get his employees all excited about the future by warning them that Microsoft would have to “make some tough choices in areas where things are not working and solve hard problems in ways that drive customer value.” People could imagine what was coming. And it wasn’t reassuring.
Now things would change, according to his email on Wednesday, in impeccable corporate speak:
We are moving from a strategy to grow a standalone phone business to a strategy to grow and create a vibrant Windows ecosystem that includes our first-party device family.
In the near term, we will run a more effective phone portfolio, with better products and speed to market given the recently formed Windows and Devices Group. We plan to narrow our focus to three customer segments where we can make unique contributions and where we can differentiate through the combination of our hardware and software. We’ll bring business customers the best management, security, and productivity experiences they need; value phone buyers the communications services they want; and Windows fans the flagship devices they’ll love.
Beyond the insufferable corporate speak? The “standalone” business Microsoft bought for $7.2 billion a year and a half ago would essentially be shut down. The costs are ballooning. The tab for the Nokia acquisition and some other moves, with both waves combined, now lists 25,800 jobs axed and $10 billion down the drain.
That’s how M&As work. They’re the ultimate form of financial engineering. Rarely does anything good come of them that moves the economy or even the company forward. Instead, they entail layoffs, write-offs, shut-downs, and economic decline. In some cases, they generate oligopolies that then can exert pricing power and stifle innovation, which further degrade the economy.
But there are some benefits. The executives of the acquired companies get a fancy package. The executives of the acquirer fatten up their corporations, and thus their own fancy package. Acquisitions are great deals for insiders and the stockholders of the acquired companies. But somebody has got to pay for it.
As in Microsoft’s case, there is a long lag between the acquisition announcement and when the “efficiencies and synergies” start wreaking havoc on the broader economy.
Despite the acquisition, Windows Phones has a miserable 3% or so of the smartphone market, not even an also-ran next to Apple’s iOS and Google’s Android. Former Nokia CEO Stephen Elop, who transferred to Microsoft with Nokia, is already gone, after having been richly rewarded via, among other methods, the acquisition. And Ballmer retired shortly after the acquisition and bought the Los Angeles Clippers for $2 billion.
