Just because a deal makes sense doesn't mean it will get done. And just because a deal is done doesn't mean it was worth doing. I am pondering deals, because of the plethora of combinations and speculative combinations that are roiling this market that need to be sorted out.
First, a word on deals. I am all in favor of mergers and acquisitions. The more deals we get, the higher the stock market goes. Deals take out supply, and if the stock is an S&P 500 member, it goes out on top.
But I am not in favor of speculating on deals, especially when you are acting on a tip. Tips, I like to say, are for waiters. If you know a deal is coming, acting on it is illegal. If you don't know, then what the heck are you speculating for? If you buy the stocks of good companies, they might very well get a takeover. A bad company? Highly unlikely that it gets a bid, and if it doesn't, you are hung on something that is most likely inflated by other tip buyers.
This brings me to Wednesday's action, which was filled with M&A and its implications.
Today my morning partner, David Faber, reported that Xerox (XRX) , which his flush with a couple of billion dollars in cash, wants to own HP (HPQ) . The company wants to offer cash and stock for HP. There's only one problem: Xerox is an $8 billion company and HP is a $30 billion enterprise.
Yes, in the current configuration, Xerox is not going to be able to buy HP.
However, if HP wanted to buy Xerox, now that's a different story, and one that people are obviously thinking about given that not only has HP's stock moved up, so has the stock of Xerox.
The deal does make a ton of sense. Both companies sell into the same channels, HP competes with a host of similarly sized companies, typically Japanese ones. If HP were to combine with Xerox, the merged company can cherry-pick the best salespeople on the same accounts, instant synergy, not to mention the costs of running a public company. Right now HP is doing well in personal computers -- it is a growth market again, but printers are different especially when it comes to selling ink. The company has a plan to both revive sales and trim its workforce while maintaining its cash flow to pay that nice sized 3% dividend.
But just because something is logical doesn't mean it is going to happen. First, HP just got a new CEO, Enrique Lores, and it is perfectly reasonable to think that he would like to at least kick the darned tires of his own enterprise. He's coming in on the heels of Dion Weisler's retirement for family reasons.
Second, HP's trying to go for higher growth models, like 3-D printing, which it excels in, not more regular old printers which is a commodity business. While Xerox has some proprietary businesses of its own and Xerox is still very small in 3-D, it is the future of manufacturing in this country and HP has a chance to own it.
That said, we know this thing isn't far fetched. Ron Orol one of my favorite M&A writers reported about a year and a half ago that HPQ tied to buy Xerox in January 2018. At that moment, Orol wrote in The Deal, that Xerox was negotiating an exit from a joint venture with Fujifilm, a deal coincidentally that was just consummated, giving Xerox $2.3 billion. If anything, that makes it more likely that HP buys Xerox. So what do you do if you own either stock? I think that HP may have trouble making its numbers. I would take the sudden profits. But Xerox? It's got cash. It's got a 2.68% yield and it sells at 9-times earnings. I see no harm in owning it.
At the same time that the HP-Xerox chatter began, we also heard that Walgreens Boots Alliance (WBA) is debating going private. Whoa, Nellie, I think this is a dangerous speculation. We have CVS (CVS) on "Mad Money" Wednesday night, fresh off its picture-perfect quarter, driven not just by prescriptions, but also by the genius move by CEO Larry Merlot to snap up Aetna, to diversify even deeper into health care. That's brilliant, because as much as we have heard that Amazon (AMZN) might want to be in health care, owning one of the largest managed care companies has proven to be a boon for shareholders.
Most important, it insures that the tepid sales at the front of the store do not bring down the enterprise as that part of the company is in direct competition with the death star that is Amazon.
Walgreens, however, doesn't have that kind of protection. It's just out there, a big store chain with not a lot of special features vs. Costco (COST) , which has cheaper prices, or Walmart (WMT) , which has more shop keeping units or, of course, Amazon.
To go private? Are you kidding me? That's a double-down on the part of the store that's sinking. Look, anything's possible. Companies do stupid things all of the time. GE (GE) did about four in a row. But if you are buying Walgreen's here, you are on your own, go buy CVS.
Finally there's Tiffany (TIF) . One of the best run companies in the world, LVMH Moet Hennessy Louis Vuitton (LVMUY) , wants to buy Tiffany, but wants it on the cheap, somewhere around its current price of $124. That's $15 billion.
That's not going to happen. I think Tiffany, even with that size, is better to be part of a larger enterprise, than it is today. Tiffany, the name, is worth a lot more than Tiffany, the brick and mortar enterprise. I have been very impressed Alessandro Bogliolo's work as CEO of the company. If you haven't seen some of the newer designs, you are missing some beautiful pieces.
That's a terrific reason to go to the store and shop. It is not a terrific reason for Tiffany to be stand alone. No one knows luxury like LVMH. It is luxury like the New England Patriots are to football.
To belabor the metaphor, Tiffany's a very good wide receiver, someone for Tom Brady to hit to spread the ball around. It's not going to be able to close all the stores and diversify away from its U.S. anchor on its own, though. The task is too big for the company to do alone. So memo to both companies: Make a deal, it's worth it for both sets of shareholders.
Again, I am pro merger. Classic example: Wednesday the lock-up agreement for Uber (UBER) expired, causing more than a billion shares to be released. The darned thing's been a disaster. Did you know, though, if Uber could offload Uber Eats to GrubHub (GRUB) or to DoorDash, Uber would probably make a bee line from $26 to $36, while GrubHub would erupt a similar amount. There's the kind of deal I love -- takes out a big competitor and rationalizes an entire industry.
You know what else needs consolidation? How about all those cloud-based marketing companies? How about all those cloud-based cyber security companies? Oh, Lordy, we need massive mergers to get those stocks going.
Mergers are inevitable. They are super if you own the stocks. They are miserable if you own the stocks of poorly performing companies that will leave you holding the bag if nothing transpires, because, remember, unless it's a hallowed brand name like Tiffany, if it isn't worth much to the stock market, that means its not worth that much to a potential acquirer.