On M&A math…
Whenever a deal is announced — and a bunch of them have been lately — there’s the inevitable press release that talks about synergies and how the deal is going to enhance shareholder value. Indeed, that’s pretty much a mandatory sentence.
But things don’t always turn out as planned when it comes to M&A, or, quite frankly a lot of other things in life. I thought about that yesterday, after reading Talbot’s (TLB) announcement that it planned to sell the J. Jill brand for $75 million to a private equity group. Needless to say, the tone was markedly different from the press release that Talbot’s put out a little over 3 years ago announcing its plans to acquire J. Jill for around $517 million.
What kind of genius does it take to turn $517 million into $75 million over the course of 39 months? What about Talbot’s advisor on the deal, which as the press release noted, was Merrill Lynch? Did they even try to raise questions about the soundness of the deal? I may be going out on a limb here, but judging by Talbot’s chart since the deal was announced, I’m guessing that shareholders aren’t buying the whole synergy thing. Here’s a snip from the 2006 release:
“Working together, we expect to capture the significant growth potential of the J. Jill brand and enhance shareholder value. We believe our proven expertise in managing a complex multi-channel operation will enable us to maximize the cost synergies of our similar business models, particularly in back-office functions.” said Talbot’s Chairman and CEO at the time, Arnold Zetcher.
Yesterday’s release was a bit more sanguine. Trudy Sullivan, Talbot’s current CEO, said that the sale would be “a significant strategic step forward for Talbots as it enables us to focus our time, resources and attention exclusively on rejuvenating our core Talbots brand and return to profitable growth.” Needless to say, there was no mention of enhancing shareholder value. Or, for that matter, synergy.
From a shopper’s perspective, this deal seemed doomed from the start. Once upon a time, I used to get J. Jill catalogs and shop at their stores, which didn’t feel quite as frumpy (or suburban) as other stores appealing to my so-called demographic. But some time ago — I don’t remember exactly when though my guess is sometime within the past three years — J. Jill lost what I’d describe as its edge and the stuff looked like more expensive versions of what you could find at Target (TGT).
It would be nice to think that as M&A starts to come back, some of the talk about synergy and shareholder value gets tempered by examples of what happens when good mergers turn bad. After all, paying an advisor a hefty fee on a deal that erases over $440 million is not a sustainable business model.
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Posted in Tags: 8Ks, M&A, PR Spin |
 11 Comments » |
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June 9th, 2009 at 10:48 am
On the other hand, kudos to Peter J. Solomon Co who certainly earned their $6.5M fee as seller’s advisor back in 2006. Nice work.
June 9th, 2009 at 11:04 am
I don’t think you should be quick with your math. The loss could be greater than $440 million.
Todd Slater of Lazard Capital Markets wrote in a report that J. Jill posted an operating loss of $76 million in 2008. Since that is in excess of the purchase price, that would make J. Jill a total loss for Talbot’s. Half of a billion dollars down the drain.
June 9th, 2009 at 11:12 am
Good point, Doug. Is there a link to that Lazard report available?
The other thing I didn’t factor in was all the retention/severance agreements that Talbots signed, which were disclosed in the 10-K filed in April. For example, Paula Bennett got a $1.2 million retention payment.
June 9th, 2009 at 2:20 pm
When you hear the word “synergy” you run, and run fast.
Good post.
June 9th, 2009 at 6:49 pm
Meh, why blame Merrill? Their job was to SELL THE DEAL and from the facts above, they did a first rate job.
You want fiduciary concern, or (gasp!) responsibility? Don’t look to an M&A broker. For that matter, ANY broker: their job is to maximize THEIR firm’s profits without doing anything blatantly deceptive that might queer other deals downstream.
What about the role of the Board of Directors, who take not fat, but nice fees to advance the interest of the shareholders? Aren’t they the ones who got the firm in over its head?
June 9th, 2009 at 7:46 pm
@ Walt French: OK — maybe fiduciary responsibility is a bit much to ask. But perhaps if Merrill’s fee wasn’t based on the size of the deal, they might have had more incentive to push for a lower price. While hindsight is always 20-20, it’s hard to argue that Talbot’s got a good price for J. Jill, given the sharp deterioration.
June 10th, 2009 at 10:58 am
JJill had $450M in revenue and was priced at $517M, TLB had $1.8B in sales and a mkt cap of ~$1.5B – both in the mkt-cap/revenue ratio of 1 region. If TLB were to say that JJill were overvalued, they would be tacitly acknowledging that they were overvalued too. I know it’s not profit, but it’s at least a rough measure.
Whenever I hear synergy I think of Teddy K.
June 10th, 2009 at 5:13 pm
I wonders if TLB had the same PR person for both of the press releases.
Acquiring J Jill: “proven expertise in managing a complex multi-channel operation”
Translation: “Yeah, we got this.”
Selling J Jill: “[selling J Jill] enables us to focus our time, resources and attention
exclusively on rejuvenating our core Talbots brand and return to profitable
growth.”
Translation: “J Jill….ewww”
@ winstongator: Synergies = Teddy K. He liked that kid who did something with cellphones.
June 10th, 2009 at 6:26 pm
@Winstongator: Nice choice! Teddy K. is the guy I think about as I read many of these filings, especially the ones involving press releases. He’s the one nodding in approval at whatever crap is being pedaled!
June 11th, 2009 at 1:27 pm
Everyone is a good deal maker is retrospect, and all of the “facts” that are used to make the case of why it was a stupid deal were known and maybe even considered positive through the lens of 3 years ago.
Some things are unpredictable and the ability to integrate two large organizations is pressed tightly against the complexity ceiling of management skills, dooming very deal like this to the world of probability and a fixed failure rate.
The failures are always similar, usually the inability to derive the oft mention and infamous “synergy” between the organizations. From my view as a long time COO or Operations Manager it stems from the lack of a well understood business plan, although these aren’t popular among the business school crowd at the moment.
June 16th, 2009 at 7:35 pm
Ummm, Walt, Merrill’s job was not to “sell the deal”, it was to advise the buyer. How did they do a first rate job if their client so obviously overpaid (I suppose it is possible that Talbot’s just mismanaged the company into oblivion, but it seems obvious there was at least somewhat of an overpayment.