Courtesy: Steve Hannaford
The gin game defined
The game of acquisitions and de-acquisitions works a lot like a game of gin rummy. For those who are not familiar with the game, here’s a description. And as playing card games other than poker and blackjack has suffered a long decline, I assume that many people under 40 have no or little knowledge of the game.
Basically, gin rummy (or gin) is a card game with two players. After initial cards are dealt, the play involves making “melds” and getting rid of “deadwood”. Melds are combinations of three or more cards (either cards of the same value- say deuces- or cards in the same suit that are in sequences-say the king, queen, and jack of diamonds). You win the game by being able to lay down usually two melds and having no cards left in your hand.
The play is a series of picking cards up and discarding them onto the “discard pile”. You discard what you judge to be deadwood, that is, cards that don’t fit into your potential melds. You can take a new card sight unseen from the deck, or you can pick up the top card on the discard pile.
Similarly, many companies are in a constant flurry of activity, acquiring and de-acquiring units. Each pickup is trumpeted as the perfect fit to existing lines of business, a business meld. Each discard is obviously considered deadwood, a drag on profits and not orgasmic to company success. The objective is a winning hand (though with companies the game never really ends).
The parallels are strong, but in one area they are deficient. Gin rummy players are limited to seven cards, and they can’t pick up cards that were discarded earlier in the game. But there is another game in the rummy family that comes closer to the strategies of big acquirers. Canasta, which originated in South America, and was wildly popular in the US in the middle of the last century, is gin rummy squared. It starts with a much bigger deck, including two standard 52-card decks and four added jokers. Players can pick up one card of the discard pile or the whole pile, giving often allowing them to have enormous hands with the ability to work on large melds. Canasta is a far wilder game than gin rummy, and each hand is likely to last for a long time.
We frequently see one company acquire another, and after the deal is done, sell off (discard) divisions or brands from that unit that do not fit into the core business activities of the acquirer. That, for example, fits the recent case of McClatchy Publishing, which bought all of the newspaper assets of Knight-Ridder, only to retain those papers that fit its business model and sell off all the others.
Likewise companies spend enormous amounts of time and energy developing (mostly through acquisitions) a new division, and then later decide that they’d rather spin the division off or sell it. For example, Clear Channel took great pains to dominate the pop music live concert business, buying many smaller, local companies and their concert sites, and working out long-term agreements to exclusive producer rights at other venues. Last year it spun off the business as a new company called Live Nation, seeking to boost revenue and, perhaps realizing that synergies were, in the end, elusive. Another example is the way in which companies like Citigroup and General Electric that had cobbled together significant insurance businesses, only to later sell them off to companies that were more specialist in the filed.
It’s remarkable how fast an area can be judged complementary, full of synergies, and a “bold expansion that builds on our strengths” to being “outside our core business/competencies/operations.”
One difference between the card game the acquisition game, is that in the real world almost always someone picks up the discards. Often now it is equity firms, who have assumed as role as safety-valve for the M&A markets. In most cases, the company or unit that is sold to the equity companies is available at some later time (for a higher price). They pick up and discard as well, but more an eye to radical restructuring of the discards and advantageous timing when that business is ready to be later discarded in turn. As private concerns owned by long-term investors they have the luxury of patience, something public companies are rarely allowed to have.
