January 21, 2004

Buy versus Build

The money center banks rolled in with good numbers yesterday (although Washington Mutual is having trouble in the mortgage market.) Here's a question though...exactly which businesses have succeeded in growing through acquisition in the last five years? I'm sure there are some. But think of the one's who haven't....Tyco for example. And think of the conglomerates that have been spinning off businesses in order to raise cash for losses in other parts of the business (GM, GE etc.) Yet yesterday, listening to CNBC while I ironed my shirt, two analysts basically reaffirmed the strategy of growing earnings through mergers and acquisitions. One said, "Everyone knows it's better to buy than to build." The other said, and I'm paraphrasing, "Only the largest of the financial institutions have the staying power to compete in a global environment...and acquistion does that." (Does what?) You may be able to grow earnings this way for a few quarters. But integrating two separate businesses and taking advantage of all the alleged "synergies" is much harder. Just ask AOL and Time Warner. Some companies do make it work. For example, the Compaq/HP merger seems to have actually increased shareholder value (although I haven't done an extensive review of this...it's just that there haven't been any catastrophes for Carly Fiorina...yet.) And what about the J.P. Morgan BankOne merger? My colleague Dan Ferris sent me a note basically expressing how terrified we all should be. I tend to agree. Bad consumer credit and commercial credit risks are being concentrated in a smaller and smaller number of businesses. Ironically, this is exactly the opposite of what Greenspan thinks is happening with the derivatives market. Greenspan calls derivatives "intermediaries." He seems to think that by packaging risk up and selling it out to thousands of different parties....by securitizing it (like a mortgage backed security for instance), the total risk is diffused through out the economy. A lot of people own a little piece of it...and therefore...the risk is diminished. No one suffers hugely if the creditors don't pay up. However, and this is a big however, in order to manage big consumer credit risk, money center banks are heavy into derivatives...and that is a risk all its own. And ultimately, the entire paradigm is debt-centered...counting on consumers taking on more debt, and servicing it regularly...without defaulting. Not a good risk to take, if you ask me, in an economy undergoing a structural earthquake in the labor market. Here's an excerpt from a CBS marketwatch article on yesterday's announcements. M&A minded Also Tuesday, Citigroup executives stressed that the company, overshadowed in recent months by a pair of huge banking industry mergers, continues to aggressively seek growth through acquisitions. "We made a targeted acquisition in consumer finance from Washington Mutual," CEO Charles Prince said on the conference call, adding that any future deals will be designed to "extend the franchise," especially internationally. See full story. Citigroup's global consumer business profits grew 14 percent to $2.66 billion, rising 6 percent versus the third quarter. Revenue from its global consumer operation rose 11 percent from year-ago levels. "Cards income increased 23 percent to $1.14 billion, a record quarter, and now serves over 145 million accounts with $163 billion in receivables globally," Citigroup said in a press release. The consumer business growth from gains in credit-card operations reflected the acquisition of Sears Roebuck's card business during the quarter.


Post a Comment

<< Home