KUHN CAPITAL Saturday, February 24, 2018
Dispatches from the front

Titanic Advice

We’ll depart here from our usual Dispatch format, where we opine on a single IT M&A topic, to address several recent industry news developments and their implications for IT and M&A in general.

When Breaking Up Is Good to Do
On July 22, Deloitte & Touche announced the results of a recent analysis that quantified the obvious: shareholders benefit when unfocused firms spin off the disparate parts.

The research looked at 118 of the largest "demergers" between 1990 and 1999, and found that -- although initially viewed by the markets as bad news -- demergers were followed by an average increase of 52% in the share price of the parent company within the first year, and by an average increase of 46% in the spun - off entity's share price.

"The potential diseconomies of scale for both separating entities are far outweighed by clarity of purpose provided by the demerger," said a Deloitte representative.

Not all acquisitions are bad, of course we'd add. Clearly thought-out combinations are just as good for business as smart divestitures. The problem arises when merger rationales are poorly conceived and executed, often the hallmark of overly -- aggressive and weakly advised CEO's.

Taking the Napster Out of Video
On July 23, the long arm of Hollywood was espied calling on friends in the Federal Government to nip Napster-like video services before they bud. Members of Congress are now asking the FCC to impose regulations to resolve disputes between Hollywood and such hardware manufacturers as Intel.

"Absent robust protection, copyright owners may increasingly restrict their best television programming to cable and satellite networks," Senator Hollings, Democrat of South Carolina, has declared.

"Don't they already?", we find ourselves wondering.

Hollings has been promoting laws requiring PC manufacturers to install special copy-protection chips in their machines. Many observers believe that such legislation would create not only substantial consumer costs but a thriving black market in "illegal" machines, making thousands of consumers criminals.

Other schemes have envisioned "Mission Impossible" files that self-destruct after one or several viewings. All such efforts are targeting Hollywood 's nightmare: widespread development of Napster-like video file sharing networks.

While we sympathize with Hollywood's plight, we're even more concerned about the industry's efforts to impose the costs and inconveniences of their copyright protection schemes on the public through Big Brother government regulation.

Holling's ideas lead to situations where government agencies have the right to inspect PC user files for infractions, or force them to use technologies that block certain types of "unauthorized" activities.

How about, instead of broad-brush new laws imposed on everyone, Hollywood concentrate instead on encyption and limited-use software technologies like those employed routinely by online applications vendors?

Or maybe assume that -- since technology is driving fundamental. irreversable changes in the standard Hollywood and broadcast TV business models -- it's time to develop new models?

Monday, Monday, So Good to Me
On Wednesday, July 31, we covered a huge IT M&A transaction: IBM bought Pricewaterhouse Coopers' consultancy (aka Monday Ltd) on Tuesday for $3.5 billion cash and stock. The move advances IBM's ambitions to transform itself from a vendor of hardware and software into a provider of IT consulting-on-demand.

PWC's decision to sell was probably influenced by the political brouhaha raised over its Monday plan, which included moving the unit's headquarters to Bermuda, a lower-tax environ.

DC politicians have been debating various ways to prohibit such movements by multi-nationals, though this debate has so far not included the option of bringing US corporate tax rates into line with the lower rates offered by many other countries.

What Does It All Mean?
These news items bring two thoughts to mind:

1) Our government’s involvement in the myriad technologies and management decisions facing IT businesses today is deepening and quickening. This involvement will inevitably and directly affect our behavior and pocket-books both as managers and consumers. Therefore, one hopes our political leaders -- having demanded this involvement -- will quickly find themselves gifted with uncharacteristic levels of insight and wisdom as they impose their new laws and regulations.

2) The cycle of herd acquisition followed by herd divestment seems to roll on following its own rhythm regardless of what business analysts learn in the interim, or how much money is lost. What we’d find useful would be a business school study comparing company cultures and CEO “styles” as these relate to risky or speculative transactions. Then, equipped with a list of warning signs, us investors could steer clear of disasters in the making. Worldcom and Tyco come to mind.

Ryan Kuhn

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