We’re in the middle of a buyout frenzy for the ages. Every day brings news of another mega deal, either real or imagined. On Sunday, Cigna rebuffed Anthem’s $47 billion offer. This failure-to-merge is a rare exception. Many large and established companies have successfully gobbled up other large and established companies in recent weeks, especially in the tech space. In March, NXP Semiconductor bought Austin-based Freescale for almost $12 billion. Singapore’s Avago paid a whopping $37 billion for Broadcom a few months later, and Intel recently completed its $16.7 billion acquisition of Altera.
This merger mania is partly a product of record low interest rates around the globe. Profitable, cash rich firms can sell bonds with vanishingly low interest rates, making major acquisitions relatively easy (and cheap) to finance. Furthermore, the US tax code encourages firms to borrow money, as interest costs are treated as a deductible business expense. Add it all up and it’s little wonder that every company out there is starting to seem like a viable takeover candidate.
But let’s not get carried away.
The fact that so many pundits and analysts are convinced that a company, any company will buy Twitter in the near future is perplexing to me. At last count, Twitter’s market cap was pushing $24 billion on $1.6 billion in revenues. That’s an insane price to pay and, as crazy as it’s gotten out there, I just don’t see anyone plunking down that kind of money for a profit-challenged social media platform, especially one that has doled out so many stock options, it will never report significant earnings per share. This whole episode has given me déjà vu. Just last month, the financial press was all but promising an acquisition of another former social media darling, Yelp. As with Twitter, its stock price lifted on those reports. Since then? Crickets.
The M&A froth may have hit its apex a few days ago when a Barron’s columnist opined that the “main value” of Fitbit—a company that had only traded publicly for a matter of hours at that point—“is likely to be as an acquisition target.” The idea that a business would go through the arduous IPO process only to be acquired is bizarre. If getting bought were a company’s end goal, it would work to make that happen well before it registered to go public. In Fitbit’s case, either nobody wanted to buy it or nobody wanted to buy it anywhere near the valuation accorded in the IPO. Add fifty percent to that valuation after its post-IPO bounce and the possibility of a buyout seems even more farfetched.
I purchased a Fitbit device recently. I’ve been wearing it for a week now. It’s been an underwhelming experience. I can’t believe I paid $150 for a piece of plastic that makes a Casio watch look like a Patek Philippe just so I can press a button and see my heart rate or the number of steps I’ve walked. I suspect it’s a fad product. Of course, I could be wrong. The company might continue to grow rapidly and maybe in this crazy, free-money environment, a larger firm with cash to burn will be willing to pay a premium to acquire its brand or its patents. I highly doubt this will happen, though. I’m even less willing to believe that anyone would go near Twitter or Yelp, at least until their valuations come down drastically. Even in this mother of all seller’s markets, potential acquisitions have to make some semblance of business sense.
[note: this post originally appeared on my Yahoo! Finance contributor page.]