Monday, October 24, 2005

Banking on waves

As predictably as the tides roll in and out, M&A bankers surf waves of acquisitions and divestitures – reaping fat fees along the way. Today’s announcement of Cendant’s split is just the latest example of the trend that has hit Viacom and others.

Bankers fuel CEO’s ambitions for increased wealth and press praise by talking up the virtues of one-stop shopping and synergies resulting from merger waves. When the CEOs bite, the bankers have companies set to be bought. This is how Cendant’s Henry Silverman got Century21, Avis, and Orbitz; Viacom ended up with CBS; Disney got ABC; and Citigroup got Salomon Brothers and Travelers. All these deals generated ample fees for the bankers and temporary praise in the media.

Unfortunately for the CEOs and shareholders, the missing piece in most of these ‘convergence plays’ was rising shareholder value. Viacom has lost 45% of its value, Disney has tumbled 38%, and Citigroup is off 18%. Surprisingly, Cendant has actually gained 70% in the last five years. But Cendant, whose shares have been stuck in the $20 to $25 a share range, is impatient.

Is its decision to split itself up into pieces a good answer to the challenge of increasing shareholder value? With Cendant stock down over 6% today, the answer in the short-term may be a resounding no.

My hunch is that nobody really knows the secret of how to increase a company’s shareholder value. But investment bankers are quite skilled at fanning this uncertainty to generate fee-generating transactions. By surfing the waves of convergence and focus, intermediaries profit while long-term investors suffer.

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