Everywhere you turn, merger and acquisition activity is kicking into high gear. Dell (UNKNOWN:UNKNOWN), a personal holding of mine, agreed earlier this month to the largest leveraged buyout since the recession at $24.4 billion. This was followed a week later with a merger announcement between US Airways (UNKNOWN:LCC.DL) and the currently bankrupt American Airlines. Yesterday, following a three-day weekend, we learned that office supply retailers Office Depot (NASDAQ:ODP) and OfficeMax (UNKNOWN:OMX.DL) are in advanced merger discussions with a deal that could be expected as early as this week.
Many investors have praised the return of M&A activity, as it's often a sign that businesses see both a return to growth and economic clarity. As for me, I'm scared to death!
Outside of quipping to friends that these latest two combinations are going to create two horrendously bad companies -- I encourage you to check out my analysis of the US Airways-American Airlines merger -- the only assumption I can draw from the latest round of M&A is that it's being done entirely out of weakness. And mergers out of weakness aren't anything to be excited about!
Starting with Dell, its two largest shareholders behind Michael Dell, including Southeastern Asset Management with an 8.5% stake, and T. Rowe Price with a 4.4% stake, have both publicly denounced the deal as too low. Dell, which is in the midst of a multiyear turnaround that will see it transition from a PC maker to an information technology company, is valued at a mere seven times forward earnings and less than six times cash flow – a pretty inexpensive mark, historically, for a company with plenty of cash on hand. Although I'm up handily on my own purchase, I feel slighted by the perceived "cheapness" of the deal as well.
Next up is the US Airways-American Airlines merger, which can't be construed as anything but a merger out of weakness. US Airways has declared bankruptcy twice since 2002 and AMR once, so how putting these two airlines together makes sense seems to have gone over my head. My Fool colleague Tim Beyers offered his perspective last week on the merger, but I continue to stick with my assessment that a transition is occurring in the airline industry whereby regional airlines, which are logistically and financially more nimble, are going to once again drive national carriers into bankruptcy if they don't downsize. This deal is exactly the opposite of the solution that I see as necessary to resolve their woes.
Finally, yesterday brought us news that perpetual underperformers Office Depot and OfficeMax might soon be joined at the hip. What happened on the release of this news? Both stocks shot up, as expected; but a more interesting tidbit was that Staples (NASDAQ:SPLS) shares rocketed higher as well, by 13%. It might seem rather odd that the main rival of an Office Depot-OfficeMax merger would head higher, but consider that merger-related integration troubles and store closures associated with their synergy would work in Staples' favor by allowing it to acquire more customers and, dare I say, take even more market share from this less-than-dynamic duo.
Make no mistake about it, this M&A activity being orchestrated out of weakness is a scary sign and not one to be excited about. Consider yourself warned!