From Publishers Weekly:
I came to the trade division at Houghton Mifflin in fall 2003 as senior v-p of trade sales, at the tail end of the Lord of the Rings movie trilogy. The French conglomerate Vivendi had purchased Houghton a few years earlier, taken it private, and had sold it to a consortium of bankers and investors at a huge loss. Vivendi was the first, but it wouldn’t be the last disastrous foreign investor in what had historically been the highly profitable U.S. education business. Meanwhile, the trade division was coming off an outstanding three-year run thanks to Tolkien—perhaps the best in its long and storied history.
The longevity of HM (founded in 1832) isn’t unique among publishing houses, but it was certainly a source of pride inside the division and within the larger corporation. There was a deep respect for the history, close attention to the present, and a vision for the future. In other words, it was a company that knew what it was about: educating and entertaining children and adults. But dark clouds were forming on the horizon.
The education marketplace had been a cash-rich business for decades, with much higher margins than those in the consumer business. Educational spending was slowly but steadily rising in these years, which attracted investor attention. In short, the industry was ripe for takeover and consolidation. Investors began leveraging these cash-rich businesses, taking on what they thought was manageable debt and looking for synergies across their acquisitions.
In December 2006, Riverdeep Holdings purchased Houghton Mifflin. One year later, Riverdeep purchased the educational and consumer publisher Harcourt Education and created Houghton Mifflin Harcourt. Both purchases were highly leveraged. In need of cash to service its enormous debt, Riverdeep sold the trade imprint Kingfisher to Macmillan, and shortly after, sold the college division to Thompson Learning (now Cengage).
It was in this environment that I was asked to take over as president of the trade division in fall 2007. A year later, the Great Recession roiled the economy and educational spending plummeted. After a tumultuous and difficult year of painful cost cutting, the trade division was put up for sale in 2009. Offers were made, but a deal was never struck. Through several debt restructurings, and a few turnovers in the corner office, the company went public in 2013.
In 2015 HMH made a cash purchase of Scholastic’s EdTech business, but the financial pressures in the education business continued. In 2018, the standardized testing division, Riverside, was sold. In fall 2020, more than 500 employees were laid off. Once HMH made the decision to transition into a primarily digital company, it was only a matter of time before what was called HMH Books and Media (Trade) was sold to continue paying down the debt.
. . . .
And now, it’s gone. Yes, the HMH logo will appear on the spines and copyright pages of books and audios for a short while, but the proud and feisty trade publisher we all loved and adored is no more, with the brand to be used by the digital technology company. HMH is now part of history, another merger story, among so many in publishing.
During my 40-plus years in the book business, I’ve experienced my share of mergers and acquisitions, but this one especially hurts.
Link to the rest at Publishers Weekly
Greater Fool Theory
From Investopedia:
What Is the Greater Fool Theory?
The greater fool theory argues that prices go up because people are able to sell overpriced securities to a “greater fool,” whether or not they are overvalued. That is, of course, until there are no greater fools left.
Investing, according to the greater fool theory, means ignoring valuations, earnings reports, and all the other data. Ignoring the fundamentals is, of course, risky; and so people subscribing to the greater fool theory could be left holding the bag after a correction.
Understanding the Greater Fool Theory
If acting in accordance with the greater fool theory, an investor will purchase questionably priced securities without any regard to their quality. If the theory holds, the investor will still be able to quickly sell them off to another “greater fool,” who could also be hoping to flip them quickly.
Unfortunately, speculative bubbles burst eventually, leading to a rapid depreciation in share prices. The greater fool theory breaks down in other circumstances, as well, including during economic recessions and depressions. In 2008, when investors purchased faulty mortgage-backed securities (MBS), it was difficult to find buyers when the market collapsed.
. . . .
Greater Fool Theory and Intrinsic Valuation
One of the reasons that it was difficult to find buyers for MBS during the 2008 financial crisis was that these securities were built on debt that was of very poor quality. It is important in any situation to conduct thorough due diligence on an investment, including a valuation model in some circumstances, to determine its fundamental worth.
Due diligence is a broad term that encompasses a range of qualitative and quantitative analyses. Some aspects of due diligence can include calculating a company’s capitalization or total value; identifying revenue, profit, and margin trends; researching competitors and industry trends; as well as putting the investment in a broader market context—crunching certain multiples such as price-to-earnings (PE), price-to-sales (P/S), and price/earnings-to-growth (PEG).
Link to the rest at Investopedia
One of the reasons that it was difficult to find buyers for MBS during the 2008 financial crisis was that these securities were built on debt that was of very poor quality.
The MBS was built on all qualities of debt, and it definitely included debt given out to borrowers who would normally never have qualified. That made the MBS poor quality because nobody knew the quality of any specific MBS. Are there zero, one, ten, or one hundred poison apples in the barrel? Care for an apple? Wanna buy a barrel?
“If acting in accordance with the greater fool theory, an investor will purchase questionably priced securities without any regard to their quality.”
The quality of the property isn’t the only thing to consider. In fact, opefations with pristine books and steady business can turn to dust in the buyers’ hands if all they look at is the “quality”. Time passes. Markets change. Often practically overnight.
Here are four giant mergers that blew up fast, most notably the worst merger ever: AOL TIME-WARNER. $99B bad. (They were rounding down.)
https://www.investopedia.com/articles/financial-theory/08/merger-acquisition-disasters.asp
Things like how to manage the combined company, how the competitive environment is evolving, and how agile the management team is matter at least as much as the “quality” and present day value of the operation.
Not mentioned above but deserving of an honorable mention is Palm computing and its merger into Hewlett-Packard, which ticked off all the possible merger failure modes. That took some doing. :D.
In the not too distant future, Bertlesmann might be joining that hall of shame. Their strategy has all sorts of red flags all over. Most notably, the Penn Central precedent.
There’s also the fact that the executives of more than one company going through a merger are focused on merger and post-merger issues instead of keeping their own businesses running well.
Financial reports are always backward-looking and the numbers don’t necessarily provide a warning until it’s too late to repair the damage caused by not paying attention to daily operations.
In many cases they’re packing their parachutes.
I believe the academic research shows that most acquisitions are not profitable for the acquirer, the exception being “bolt on” acquisitions. That, in turn, can make them unprofitable for those acquired, as mentioned in the previous comment. I remember hearing Stuart Anderson, the founder of Black Angus Restaurants, talk many years ago. He sold out for shares of Saga, only to see it go bankrupt. Sad tale see all he’d worked create go down. Subsequently, the Black Angus chain went through many owners, and eventually largely disappeared through mismanagement. Anderson was part of the reason that when I sold my investment firm I insisted on cash along with a note, and that the note be immediately payable if the company was resold (which in fact happened.)
“Greater fools” have never been more abundant in my forty year investment career than now. What is the intrinsic value of a cybercurrency? A tulip bulb is worth more. Time will tell.
I could boor you with pages on this.
Alas, everyone wants to sell their company for cash. Problem is, buyers are unwilling to spend real money to acquire. It’s all funny money.
In my case, we were only a $14M firm at the time, and the “threshhold” to go public ourselves was a minimum of $20M. This was the only offer we received that wasn’t 100% stock (we did get some minority cash), and the acquisition “window” was closing rapidly (verified in 20-20 hindsight). It was either sell soon, or watch it all dissipate via inadequate funding to grow rapidly.
I still have the fleece garment branded by the acquiring company which I refer to (not quite accurately) as my “million dollar T-shirt”. Unlike the issuing company which lasted about 5 months, that fleece shirt will live forever. I’ll probably be buried in it. Then I look forward to haunting those crooks inventively.
The acquiring company must do due diligence on the target, and the target has to open its books in the process.
What is often overlooked, however, is that the target needs to do its own due diligence on the potential acquirer, who is under no equivalent obligation to expose its own books and may not even be a public company. (As I myself have learned through a painful acquisition experience as the acquiree.)
One company I was #2 in was acquired as part of a “regional roll-up” of internet consulting companies to complete a national firm that would then go public. (This was not an uncommon practice in the late 90s.) We were the last company acquired (to be paid partly in new public company stock), and immediately after the acquisition the acquirer went public, and folded very shortly thereafter. This was a planned failure with specific timing — the acquirer’s shareholders sold out before failure, while their acquired targets were restricted from doing so and lost everything.
I was the primary debtor, and so became the head of the bankruptcy committee. (This is more commonly the landlord or utility debtor, not a private individual). This was (as they say) an interesting learning experience. Part of my role included (finally) getting to see the books of the acquirer, who had lied about assets (including my own company’s assets, inflated from what we told them), among many other issues.
BTW, due to the amusing bizarre interlocking domino collapses of so much of my industry in that period, some of which earned judicial compensation in their competing lawsuits, we emerged from the bankruptcy with a small PROFIT (none of which helped compensate the acquired corpse companies and their onetime owners, like me).
A long time ago, a client went through a lengthy lawsuit, alleging fraud on the part of a business partner. My client ended up winning the suit and the partner disappeared in lieu of paying damages.
Afterwards, we were discussing some what I thought were valuable business lessons learned from the whole mess. His response was, “It would have been a lot cheaper to go to Harvard.”
He was quite correct. I went to Yale, and there I learned not to sue crooks like this.
On the other hand, if I’d gone to the School of Hard Knocks, I’d have learned not to make the original acquisition deal in the first place (actually, I was #2 and just concurred with #1’s decision, but still…).