Mergerpalooza and Its Ramifications

In this episode of MarketFoolery, host Chris Hill chats with analyst Jason Moser about three big mergers. Tiffany (TIF) is being tucked into Louis Vuitton, which looks like a great move for LVMH Moet Hennessy. Where does Louis Vuitton go from here with the jewelry retailer? Schwab's (SCHW 1.08%) acquisition of TD Ameritrade (AMTD) could have much larger ramifications for consumers...but it probably won't (hopefully). Meanwhile, eBay's (EBAY 0.70%) sale of its StubHub platform made the online marketplace a tidy profit, but leaves some pretty big questions about its long-term plans. Plus, Jason shares some weird cooking tips for Thanksgiving this year. Tune in to hear more.

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This video was recorded on Nov. 25, 2019.

Chris Hill: It's Monday, November 25th. Welcome to MarketFoolery. I'm Chris Hill. With me in studio, the one and only Jason Moser. How are you?

Jason Moser: Gobble gobble. It's an exciting week. We're already planning out the menu. We'll have a lot of food made this week, I'll tell you what.

Hill: Nice. We'll get to that but first, it's merger Monday. This is an all deal-making show today. We've got deals in finance, in retail/entertainment.

But we're going to start with the luxury goods industry. Tiffany has agreed to be acquired by Louis Vuitton for just over $16 billion in cash. Louis Vuitton, holy cow, that's a big company, at least in terms of the portfolio of brands for LVMH. You've got fashion, cosmetics, watches, jewelry, and now, I would argue, probably the most iconic jewelry brand is now part of the empire.

Moser: Yeah. Probably the most iconic. It definitely means a lot to a lot of people. I think, honestly, the deal makes sense for Louis Vuitton. This is right in their wheelhouse. When it comes to luxury brands, it's kind of like Foolish investing in that it's nice to have a nicely diversified portfolio of offerings so that you're not terribly dependent one thing. The nature of this business is, you want companies like Tiffany to succeed, but you have to be aware of how successful they are, because the more that brand saturates the market, then the less exclusive it becomes, people don't necessarily want it as much, it's seen as maybe not as exclusive of an offering. So, they do have to walk that fine line. Tiffany has a very long track record of doing that, of managing the brand very well. They don't pursue those big liquidation sales or Black Friday sales or whatnot. My suspicion is, the difficulty with Tiffany's investment has always been the lumpiness of it. You like to buy the stock when times are tough, sell it when things are going pretty well, and rinse and repeat.

This, I think, makes a lot of sense for Louis Vuitton. It'll give them a chance to run this business without having to maybe answer to those quarterly expectations so much. Like you said, an iconic brand that I suspect they'll continue to invest in.

Hill: Where does Louis Vuitton go from here? The stock is up 1%, 2% today. Obviously, shares of Tiffany are up. But this seems like Wall Street not only liking the deal for all the reasons you just laid out, but also for the price tag. If instead we're seeing Louis Vuitton shares down 5%, something like that, well, then you can look at that and very quickly conclude that they paid too much. This seems like no, they did a great job here.

Moser: Yeah. I do think the price tag actually makes sense. It's around 28X full-year estimates, which really isn't all that crazy with a stock that trades anywhere in that 24X to 26X multiple usually. Tiffany has been facing some headwinds recently. You see them quoting the weakness in Chinese tourism on the calls. They're quoting, obviously, the unrest in Hong Kong. This is a business that generates a good half of its revenue from that Asia geography. I think for Louis Vuitton, it is just a matter of bringing this thing in house, determining the investments that they want to make -- because right now, Tiffany under somewhat new leadership, they've been making a lot of investments in the business, particularly in the flagship New York City store there. Normally, a business that invests somewhere in the neighborhood of 6% to 7% of sales, they've been talking about investing anywhere from 8% to 10% of sales in order to reinvigorate the brand and bring it up a little bit more with the times. I would guess that's what Louis Vuitton is going to determine, is how those investments should look going forward. Again, the heavy lifting is done in getting this brand to where it is today. I think they want to just continue that status quo.

Hill: This isn't a stock I've ever even come close to thinking about putting on my watch list. It's up 50% over the past year. It makes me think maybe I should widen my gaze a little bit.

Moser: I mean, I agree with you to a point. It's one that I followed for a long time, and one that I saw over and over again, it really is, like many plays in retail, one of those types of investments where you have to buy when the news is not so good, and then you have to be willing to sell when things are starting to look a little bit better. It's a difficult investment to buy and then plan on owning for three to five years, unless you feel like you could stomach the volatility.

But, we go back to the summer of 2018, management was buying back a ton of shares at an average of around $130 per share, which is right about where the stock is today. Again, it is a difficult investment to make because it's a bit more of a value style investment. But, yeah, when you take the longer view, there's clearly a lot of value in the brand, and Louis Vuitton will recognize that.

Hill: All of the paperwork is finally done. It is now official, Charles Schwab is buying TD Ameritrade for $26 billion in stock. Both stocks up a little bit today. We were talking about this on Motley Fool Money. You were making the comment that you used to be someone who had money with Scottrade, then TD Ameritrade by Scottrade, and you had to go through the whole process of a platform switch. I was struck by the fact that, this morning on CNBC, they were talking about this story -- kudos to Becky Quick for being the first person to break this story last week -- they were talking about the very real possibility that Schwab keeps Ameritrade intact as a trading platform, that they're looking at, where is the overlap. Basically, there's a good case to be made that Schwab decides, "We're going to keep the Ameritrade trading platform right where it is."

Moser: I would not push back against that at all. First and foremost I hope they don't use this deal as an excuse to then just conveniently pivot away from those zero-dollar commissions that we've come to know and love over these past few months. You're looking at consolidation here, where ultimately, they could start maybe exerting a little bit more pricing on that side if they wanted to. I don't think they will do that.

But, to your point, yeah, I did notice on my TD Ameritrade platform today, I logged in to check something out, and there's the big yellow bar up there saying, "Guess what, we're becoming a part of the Schwab family!" And immediately, my stress level jumps up a tad, because I know I'll have to deal with some sort of customer experience here that's going to be less than optimal. From that perspective, particularly when you consider that the Scottrade migration didn't happen all that long ago, and I think a lot of people out there really do like the platform TD Ameritrade has, a lot of users have come to like the way that it works, I wouldn't be surprised at all to see them just leave that alone, keep doing what it's doing. It's nice to have the scale. It's nice to have the numbers in your favor. But it's a real opportunity for Schwab on the customer side, on the customer service customer experience side. They could go one of two ways with this. It's a real opportunity to show that customer-centricity. And I think one way to do that would be to at least offer up the perception that, even though you might be a part of this bigger family, you still have choices in how you choose to transact.

Hill: Particularly since a whole bunch of TD Ameritrade customers, including you, have already gone through the process of being essentially migrated over from the Scottrade platform. You like to think that they're going to be smart enough to be sensitive to that and act accordingly.

Moser: I would think so. Again, that's anyone's guess. I have to believe when you've got people in the executive suite making that kind of money, they're thinking about these kinds of things. Hopefully they're resorting to actual market data to get a better idea of what their customers actually want.

There was a piece in The Wall Street Journal I was reading today, an interesting sub-angle to this story. It's in regard to registered investment advisors. We probably don't think about that a lot, given our job, but there are a lot of RIAs that use these big brokerages in order to transact for their clients. When you look at Schwab, which is the largest platform in regard to RIAs, close to a couple of trillion in assets, and 7,000 or more RIAs, as they've taken that commission model basically down to zero, those RIAs matter even more now, because they're responsible for parking lot of that money that Schwab is going to be using to make their money with things like net interest income and account-related types of revenue there. They're going to need to make sure, again, from a service perspective, that they're taking care of that demographic, beyond just the retail investors like us. My suspicion is they will do that. It's a big company with a lot of experience in the space, and a reputation of wanting to do the right thing for the customer. Time will tell, but there's no question this is a whopper of a deal.

Hill: Should I buy a couple of shares of E*Trade on my fervent belief that I cannot believe that a year from now, E*Trade is a stand-alone public company? With all that we've seen over the last few months, including this consolidation that we're talking about today, I cannot imagine a world in which E*Trade is still a stand-alone public company in a year. Someone's going to buy them.

Moser: I agree with you. I think more than likely, someone will. Now, with that said, we typically don't use potential acquisition as a thesis.

Hill: Oh, that's right.

Moser: But, based on your verbiage there, a couple of shares, that would imply that you know that's a bit of a riskier move, so, yeah. If you're looking to break a rule here or there, I can think of worse things to do.

Hill: In 2007, eBay bought StubHub, the online ticket exchange platform, for $310 million. Today, eBay is selling StubHub for over $4 billion. They're selling it to Viagogo, which is an online ticket marketplace. This seems like a smart acquisition by Viagogo. We've been talking for a while about eBay ... well, what's the polite way of putting it?

Moser: [laughs] They're still trying to figure it all out.

Hill: Well, no -- they're still trying to figure it all out, but also, we've been talking for a while about how they've basically put StubHub out there to the world, and said, "Is anybody interested?"

Moser: And much like Louis Vuitton bringing Tiffany into its world, I think this makes a lot of sense for Viagogo. StubHub is certainly more in their wheelhouse than it is in eBay's. I do believe, yes, eBay is still a business very much trying to figure it out. It's got a really funny history where these types of investments are concerned. If you go back, for example, to 2016, eBay divested a really big stake, close to 20% stake in MercadoLibre. At the time, MercadoLibre was around a $7 billion market cap. Fast forward to today, MercadoLibre is the same size as eBay at about $28 billion. I don't know what the justification was at the time, but it seems like they left an awful lot of money on the table. A lot of us were speculating that maybe eBay should consider buying MercadoLibre at a time. That ship has certainly sailed.

For StubHub, it's a business that's responsible for a little bit more than $1 billion in trailing 12-month revenue for eBay, which is about a tenth of eBay's overall revenue. It's not growing much either at this point under eBay's stewardship. So, I think it just makes a lot of sense to go ahead and cut it loose. I think the big question now is, what is management going to do with that money? They say it's going to go toward buybacks, dividends and M&A. They've spent more than $20 billion on buybacks since 2014. They do yield a nice little dividend there. The share count is down around 33% since then, as well. Whether this works out for investors or not, I've always looked at eBay as an also-ran in this e-commerce world. It's got an attractive business model with high margins, they just can't seem to figure it out fully. This is just another page in that book, it feels like.

Hill: We've talked a lot recently about retail heading into the holiday season. eBay has never come up in those conversations. I think that I'm putting eBay on the list of retailers who need to have a really good holiday season. When I look at the way eBay is positioning itself from a marketing standpoint, I think there's a lane for them to succeed in. In a weird way, I think the lane positions them against Etsy. I think eBay is trying to position itself as, "This is the place where you can get stuff that you're not going to get elsewhere. It's also the place where you're going to get stuff for less than you're going to find elsewhere." But I think it's that first category that they really need to crush.

Moser: Yeah. You've certainly seen eBay advertising more on TV recently. Etsy, as well. Both companies have undertaken pretty massive marketing campaigns in order to create more brand awareness. I do agree, there are a lot of similarities in the two businesses there. I could certainly see a world where eBay would be very interested in owning Etsy. Etsy right now is looking like a steal, given the recent pullback in shares. Still, when I look at Etsy, I think Etsy has done a much better job of communicating its brand, and what you get in shopping on their platform. eBay, to me, even after seeing the advertisements -- admittedly, I've never even used eBay in my entire life. Never even used it. It's just not something I've ever needed to use. I'm still not fully sure why I would use it, unless I'm looking for some type of collectible or something that someone's selling that they don't want anymore. So, it is a little bit different from Etsy in that perspective. But, yeah, I think communicating a bit more of a clear understanding as to what you're using eBay for, for new people, for new prospects, is going to be really clutch. I think Etsy's done a very good job of that to date.

Hill: When you think about the acquisitions eBay has made, and the subsequent sales or spin-offs of those acquisitions, for a good stretch of time, you could look at eBay's business and say, "Well, they've got PayPal. That's the secret sauce to that business," or, "They've got StubHub, that's a nice little additive to their bottom line." With every spin-off that they execute, eBay becomes the marketplace business, and just the marketplace business.

By the way, when I say I think they need to have a really good holiday, I don't mean the same thing when I'm talking about Macy's and Kohl's. It's not, "Boy, they'd better have a great holiday or they may not be around in a couple of years." I don't think the underlying business is in favor of going to zero. But, I really think they need to have a good holiday.

Moser: Yeah, they do. You're right, the business itself is in pretty good shape. It generates fantastic margins. It's a cash flow rich business. They've got a nice balance sheet, especially after this deal when they unload StubHub. It really is just a matter of what they decide to do with those funds. Maybe eBay is just recognizing their place in the world, and it exists as a smaller company than maybe what they once aspired to be. You can certainly do that, and investors can benefit nicely from it. But, yeah, a nice holiday season would go a long way in communicating what exactly they're trying to do over the course of the coming five years and beyond. It does seem like they're really falling back on being just that one thing, and we're going to find out if they can do it really well.

Hill: Real quick, before we wrap up. We've obviously got the Motley Fool Money Thanksgiving special coming later this week. One food-related tip for people who are thinking about their own Thanksgiving, maybe they're going to their family members' or friends' house or something like that. Just a little something.

Moser: I'll give you something easy to do. Every year, I feel like, I mention the peanut butter stuffing, so I'll go ahead and throw that out for good mention. Just throw a nice dollop of peanut butter in that turkey there before you throw it in the oven, and you go town on that stuff after it's done. You mix it in with your green beans or your stuffing or whatever else. If you like peanut butter, it's really tasty.

But one thing we did last year that I really liked, you've probably heard me talk about Dizzy Pig before here, the spice company. It's a local provider here. Small company, but they make some great rubs. They have a rub called Mad Max turkey seasoning, which is just so good. I'm going to steal a Triple-D Guy Fieri colloquialism here, you could put that stuff on a flip flop and it'd be good. If you get a hankering for something to season up your turkey, that Mad Max from Dizzy Pig is really good. Pile it on there, slow roast that turkey. It is delish.

Hill: Jason Moser, thanks for being here!

Moser: Thank you and Happy Thanksgiving!

Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. The show is mixed by Austin Morgan. I'm Chris Hill. Thanks for listening! We'll see you tomorrow.