History doesn't repeat itself on Wall Street but the mergers and acquisitions spree of the last few months has the same basic rhyme of another era. No it's not 2000 or 2007. The drumbeat today goes back the 80's and a certain pulsing beat that calls to mind Prince music, mullets and unforgettable predator's balls.
It was about 1983 that a bond trader named Micheal Milken and his firm Drexel Burnham Lambert popularized the use of so-called junk bonds as a way to finance takeovers. Formerly the source of funds of last resort for firms on hard times, junk bonds became the preferred tool for what were then called "raiders" making audacious deals. One of those pioneers was a guy named Nelson Peltz who in 1985 bought National Can, a company six times his firm's size, using Drexel junk funding. A year later Peltz doubled down on American Can. Two years after that Peltz and his partners sold his levered can conglomerate for nearly $850 million in profit.
Peltz was a young man at the time, just 46. Let's just say he knew a good game when he saw it. Yesterday Peltz and his Trian Fund Managment made a cool $119 million when Family Dollar (FDO) agreed to be purchased by Dollar Tree (DLTR).
It wasn't just the Peltz name that brought me back to the 80's yesterday. It was also the nature of the deal. See I was there in the 80's, or at least I got to watch first hand. My dad was running a company called Dayton Hudson when the Haft Family tried to do a hostile takeover. It was 1987 and the environment for deals was out of control. The prevailing mood was one of kill or be killed and the bankers were playing both the hunters and the vultures.
The 80's LBO frenzy ended when a guy named Robert Campau took over Bloomingdales only to to see it collapse under $70 million monthly interest payments. It turns out leverage and retail, with its small margins and economic sensitivity, are a terrible match.
That was true then, that's true today. The deals we're seeing, particularly yesterday's Family Dollar / Dollar Tree merger, have no real synergy. It's a busy work deal that creates a ton of fees. Does it end well? You be the judge. Peltz, Icahn and the rest of the guys out there who are using all the modern versions of junk bonds aren't gonna stick around and run these companies; they're gonna take their profits and take off. Investors should consider doing the same.
- Mergers, Acquisitions & Takeovers
- Nelson Peltz
- Family Dollar
- Drexel Burnham Lambert