When in doubt, change the narrative. That's been a continual theme of mergers and acquisitions this year. I think that, despite so many worries about what 2018 will bring, there will be more changing narratives coming, because they work, and work fast even if the approvals seemingly take forever.
Today's narrative-changing involves two companies with stocks that the CEOs are none too happy about: Disney (DIS) and CVS Health (CVS) . The former is once again kicking the tires of Twenty-first Century Fox's non-sports and news divisions -- not that it needs those. The latter is taking the plunge and buying Aetna (AET) , to become a gigantic one-stop pharmacy-benefits manager and health clinic within the store.
Both are defensive deals. Disney, despite incredible numbers from its theme parks and its movie division, simply can't get out from under the subscriber counts for ESPN and the fear of cord-cutting. To some degree, that pigeon-hole is simply unfair: there are lots of ways to get ESPN, and we seem to only credit those that come directly from the television set.
Even the shrewd acquisition of BAMTech, to give Disney what could be the best seamless sports experience from television to the internet, hasn't mattered. It seems that if you are rooted in "old media" no one accepts your forays into so-called new media. So, Disney would be doubling down on television and film while expanding its footprint overseas where the growth is.
Oddly, this is one of those deals where Disney should just get it done because, like when United Technologies (UTX) paid up for Rockwell Collins, there simply aren't a lot of "beach front properties," as UTX CEO Greg Hayes said at the time, left for a company that wants to make aviation its hallmark.
I think that Disney-Fox is exactly the same kind of case. Why not get it before Comcast (CMCSA) does, or Action Alerts PLUS charity portfolio holding Alphabet (GOOGL) , for that matter? It does more to help Disney's "ESPN" problem than anything that Disney could do, including buying back more shares.
The company has crunched about 100 million shares in the last two years, and if those buys were meant to move the shares higher, the buyback seems a bit pyrrhic, because the stock is about the same price for that period, well behind the market.
That, again, is ESPN sub losses talking, as the rest of the business has been superb. You combine entertainment assets, you get an immediate boost that gives Disney time to develop its own over-the-top offering featuring BAMTech. Who will obsess on ESPN then?
Until Sept. 3, 2014, CVS Health was known as CVS Caremark. That's when the company stopped selling cigarettes, as tobacco seemed antithetical to the notion of CVS becoming more like a healthcare company, given 7700 retail pharmacies and almost 1000 walk-in clinics.
Lotta good that did. The stock's basically unchanged since then -- again, like Disney, a company perceived as being left in the dust by others, namely the phantom that is Amazon AMZN. By buying Aetna for cash and stock, the company becomes a health care business with a brick-and-mortar store.
In one fell swoop, CVS would go from a low multiple retailer to a high multiple health company that is no longer shadow-boxing Amazon. Again, it doesn't matter how much Amazon pays for Aetna; the story has changed.
Now it only needs to get rid of the food aisles and expand the walk-in clinics -- something that would make a stock buyer feel better, given the coming competition for everything food that CVS tries to offer. Next thing you know, they will take out "bad food" and become your one-stop for healthy food and health care.
Now, like when CVS bought Caremark, the stock is getting hit. Back then, CVS's move was widely perceived to head off Walmart's WMT initiative to sell generics for $4. This time, it's taking a hit to gird for war against Amazon. I say, why not; its stock has been trapped in retail purgatory. That ends as of today.
We know most acquisitions are done for scale and cost take-out. But sometimes they are done to change the whole image of what you are buying. That's the theme of both these deals. And when they are completed, the stocks will run. The regulators may dally, but the stock buyers might not, as they have avoided the stocks for current prospects, but the future, overnight, looks a lot more rosy.
