Natural Deselection
Survival of the fittest rules the jungle and the markets. In the jungle, predators like pythons and crocodiles battle for the "apex" title. Once in a while they battle each other. Sometimes crocodiles eat snakes. Sometimes snakes eat crocodiles. Sometimes even when they "win" a meal, they still die. Sometimes the meal is just too big.
This happens in markets too. AOL bought Time Warner in 2000. It "paid" $162BN. It was a disaster. Both businesses floundered. The pair never recovered their value from that snafu. It was a "merger of equals" only because of the dotcom bubble and AOL's inflated share price. Paramount — a small company — is in the middle of buying many of those same assets again for $111BN. It's not just media. Lamplighter remembers excruciatingly when Colony Capital, NorthStar Realty Finance and NorthStar Asset Management merged. This monster debuted at over $40 per share. Softbank is now picking the bones at $16 per share.
Why does this keep happening?
Incentives. Snakes and Crocodiles brains are programmed to eat. That's the reward. The more they can eat the more apex-y they get over time. They wouldn't have gotten as big as they are without that instinct to eat everything.
Snakes in the boardroom
Execs have incentives to get big too. Bigger companies pay more. Here's GameStop — a mood and a meme stock — giving its CEO, Ryan Cohen, an absolute unit of a pay package. The headline comp is $3.5BN. To get it all, Ryan needs to guide GameStop to a market cap of $100BN by 2036. Its market cap today is around $11BN. That's almost 10x in 10 years.
This is the top end of the package. There are other hurdles along the way, but this is what everyone — the CEO, the Board, the shareholders — wants.
You could put yourself in Ryan's head: "Going from $11BN to $100BN: hm, that's really hard. Hey! You know what's easier? Going from $66BN to $100BN."
$66BN would get Ryan into the middle range of the options package. To get the rest, instead of needing to gin-up $89BN of value, he'd only need to find $34BN. That's growing 4% per year versus 25% per year for 10 years. Much easier.
Cohen: "Now, how do I find another $55BN in market cap? I could do good business stuff or…"
Here's GameStop offering to "buy" eBay for $55BN. That would get the combined company to $66BN. That's the idea anyway.
GameStop doesn't have the cash for the deal. It's hoping to use a mix of debt and shares… and socks. The deal seems…unlikely to get done. BUT the incentive is there. And it’s a huge incentive.
In the bungle
The history of these types of deals sucks. Even if it doesn't go through, it’s a distraction. Lamplighter likes the management of eBay. Its talked about the outfit before. It recognizes the valuable ability of Cohen to ring shareholders value from vibes. But the outside track record suggests long odds for anything good happening and a vastly higher chance of execution hiccups induced by the distraction of a wild deal. There's easier prey in the jungle.
Disclaimer: None of this is investment advice. It's meant to illustrate ways LCM thinks about investing. Things that LCM decides are good investments for LCM and its clients are based on many criteria, not all of which are covered here. Some or all of LCM's ideas may not be suitable for other investors. LCM does not recommend investing either long or short any position mentioned. LCM may own positions in some of the companies mentioned. Some of its ideas will lose money — investing entails risk. See full disclaimer here.