Fin - Breakout - US

Dos Hombres: Wal-Mart, Corporate M&A and What Really Matters

Jeff Macke

In the noise of corporate reports and financial reporting, what actually matters and what it really means to investors often gets overlooked.

At "Breakout," our goal is to sift through the news, take out the spin and tell you what it means to you as consumers and investors. The axes we had to grind today focused on the beaten-to-death topics of Wal-Mart (WMT) and the perception that the torrid pace of corporate M&A was somehow bullish for stocks.


Your recent headlines:

* Wal-Mart is the defendant in the largest class-action lawsuit in American history -- the latest salvo in criticisms of the company's business practices that date back at least 20 years. In the long term, the suit simply doesn't matter to Wal-Mart on an operational basis. But Wal-Mart strikes me as a stock to be avoided, a point "Breakout" will elaborate on in a later post.

The Wal-Mart news you should care about:

* WMT CEO Bill Simon is on the front page of today's USA Today saying he expects inflation. CPI and PPI, the government's traditional measures of inflation, are so convoluted and manipulated that most traders I know ignore them almost completely.

The government doesn't spend every day buying merchandise that they then sell to consumers. Wal-Mart engages in that activity to the tune of $1.5 BILLION a day.

It's worth noting that an ongoing criticism of Wal-Mart is that the company is using its massive scale to grind down its suppliers. There isn't a company on earth more adept at getting lower costs of goods. Forget what the government says about CPI and PPI and pay only passing attention to prices at the pump. Wal-Mart is telling us prices for consumers are going higher. QED: prices the American consumer pays for everything are going higher. Plug that into your consumer recovery assumptions accordingly.

Corporate M&A

Your recent headlines:

* "Corporate balance sheets are better than they've been in years! Buybacks are up, and M&A is off to the fastest start in years. This is bullish for stocks."

The reality of flush balance sheets:

* The vast majority of large-scale corporate mergers, buybacks and dividend hikes are either a disaster or entirely neutral for the acquiring companies. The burden of proof for this statement being spurious is actually on those spouting the bullish interpretation. Show me five huge deals that worked, and I'll reconsider my view that Big Corporate Deals are net negatives for shareholders.

Until then here are four buyback/buyout efforts that did less than nothing for shareholders:

1. Microsoft (MSFT) kicks $32 billion back to investors via a one-time $3 per share dividend. The deal was initially announced in May 2004. Microsoft's stock is down 4.26% since and never spiked off the news. On the upside, at least it kept Microsoft from doing another buyout.

2. AOL/Time Warner. 'Nuff said

3. Hewlett-Packard (HPQ) spends $1.2 billion for Palm. H-P figured this purchase would expand its efforts in smartphones. Have you bought an H-P/Palm smartphone lately? I thought not.

4. Home Depot (HD) issues debt to buy back stock. If you did that in your own account it would be called recklessly going on margin. Why it should be thought of as anything else in the case of a company buying shares in a stock facing declining margins, a rotting core customer and way, WAY, too much real estate is simply beyond me.

The point isn't to denigrate the idea of corporations putting cash to work. The point is to question the ability of these corporations to execute the deals effectively. All the companies mentioned above accumulated their "excess" cash by executing a core business which had nothing to do with dabbling in private equity.

Buybacks, buyouts and one-time dividends simply don't drive stocks higher. If you want to buy I-banks based on increased M&A, knock yourself out. If you want to buy the acquirers you're on your own as far as I'm concerned.

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