Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.
May 20, 2013 at 10:22 AM
Yahoo’s big Tumblr deal: a sign of things to come?
Ever since the end of the recession, analysts have been predicting a revival of mergers and acquisitions. While some big deals have been consummated — American Airlines and US Airways, Amazon.com and Goodreads, and the buyouts of Dell and Heinz — predictions of a broad M&A revival in the United States have mostly come to little. Global deals performed better. For example, a report from the Jordan Edmiston Group, an investment bank, showed the value of M&A deals in marketing and related sectors fell 38 percent from the first quarter of 2012 to the same period this year. Overall, deals were down 4.4 percent from a year ago.
Now, with Yahoo’s $1.1 billion deal for Tumblr, will more mergers become a part of the bull market? This deal is a gamble on the part of Yahoo CEO Marissa Mayer, the turnaround boss who came from Google. The social networking and microblogging site attracts 300 million visitors a month; it’s also unprofitable. You can’t acquire your way out of trouble. But Yahoo shares are up modestly this morning.
Some areas look promising, if M&A is your thing. For example, Vodafone Group, which could net $100 billion for selling its stake in its joint venture with Verizon Wireless, is seen in the market for new deals. Talk in the railroad industry has Kansas City Southern, which controls a lucrative line into Mexico and is the smallest Class I railroad, seeking a buyer. With corporations sitting on record cash and interest rates low, there’s plenty of means to do deals.
On the other hand, deal-making can’t be totally removed from the broader outlook. The newest Strategic Outlook from Russell Investments is instructive:
The stellar start to 2013 in equity markets makes us cautious about the near-term outlook. Markets move in cycles of optimism and pessimism, and the risk is that investors have become over-optimistic about the outlook for the U.S. economy and are underestimating the downside risks out of Europe.
U.S. fiscal tightening will be largest since 1969, keeping growth weak. The corporate profit outlook is “sluggish” and Russell argues that profit margins have peaked. We will see if this is an environment that supports mega-deals, or if Yahoo is a strategic one-off — or, rather, one of a relatively few big deals. [UPDATE: Dish Network's Charlie Ergen has made a $2 billion bid for LightSquared.]
M&A is always dicey for the Seattle region. Our big dogs, such as Microsoft and Amazon, are the acquirers. But more often, local companies are acquired by outside firms. And M&A rarely means more jobs if you’re among the acquired.
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Today’s Econ Haiku:
Dimon’s in the rough
Will shareholders split his jobs?
Sticks or a carrot?