Feb. 11, 2020

Urge to Merge: Why M&A Deals Happen

Urge to Merge: Why M&A Deals Happen

For corporations, not everything about getting together is Russell Stover chocolates and long-stemmed roses. So to celebrate the Brew’s Merger Week (keep reading for today’s big piece)...

For corporations, not everything about getting together is Russell Stover chocolates and long-stemmed roses. So to celebrate the Brew’s Merger Week (keep reading for today’s big piece)...

 

Today on Business Casual: Axios Business Editor and author of the Pro Rata newsletter Dan Primack explains why mergers and acquisitions happen...and why they don’t.

 

In addition to figuring out what today’s M&A means for bull market health, in the episode we...

  • Navigate where the biggest red flags are for today’s megadeals, from unpredictable antitrust regulation to political nationalism to the 2020 election
  • Determine the next big space for consolidation
  • Parse out the logistics of some of the most outlandish deals the internet’s dreamt up (looking at you, Apple/Tesla)

 

Plus, Primack explains what options are left for Harry’s now that the FTC sued to block Edgewell’s acquisition of the razor maker—and then called off the deal. (FYI, this was recorded riiiight before Edgewell pulled the plug.)


Transcript

Business Casual - Dan Primack.mp3


Kinsey Grant, Morning Brew business editor and podcast host [00:00:07] Hey there, and welcome to Business Casual, the weekly podcast from Morning Brew, exploring the biggest, most timely themes in business. I'm your host and Brew business editor, Kinsey Grant. And now, let's get into it. [sound of a ding] 


Kinsey [00:00:19] So if you haven't been paying attention because maybe you've got more important things on your mind, this week is Valentine's Day. But beyond reminding you that flowers say I'm sorry and chocolate says I'm love you, I am here to help you go the extra mile and all of Morning Brew is. We're doing an entire week of content dedicated to mergers and our newsletter. So what make merger's work? Why do they happen in the first place? What are the impacts once a deal is signed? Morning Brew is writing up everything and sending it to all 1.8 million of you and we're gonna figure it all out. But Business Casual has never been one to turn down a theme. 


Kinsey [00:00:54] So in the spirit of Valentine's Day and Morning Brew's merger week, we're doing our very own merger episode and answering all of those really important questions that I just posed. So today, I am really excited to welcome one of my own favorite journalists on the show, Axios' Dan Primack. Thank you for joining me. 


Dan Primack, Business Editor at Axios [00:01:12] Thanks for having me. 


Kinsey [00:01:13] I am really excited to chat. As I said, you are one of my favorite journalists and we love to read your work at Morning Brew. You are the business editor at Axios, correct? That's your official title? 


Dan [00:01:24] That's my official title. But also write the Pro Rata newsletter every morning at signup.axios.com, and also do the Pro Rata podcast. 


Kinsey [00:01:30] Yeah. And Pro Rata is great. You have a really quick podcast every day that is kind of a 10-minute or so snippet of what you need to know. I love listening to it. I listened to it this morning before I came in to do this podcast. And like I said, we love you at Morning Brew. We cite your work in our newsletter pretty frequently. But you're based in Boston, right? 


Dan [00:01:48] I am, yeah. 


Kinsey [00:01:49] So we're doing this one remotely. I wonder if you're just hiding out until Super Bowl fanfare passes over. You're a Pats fan, aren't you? 


Dan [00:01:57] I'm not aware of a Super Bowl. [Kinsey laughs] I thought they canceled that. Why would they have held that? 


Kinsey [00:02:01] Yeah, why? Why? I don't get it. laughs] The only reason they had it was for that Hulu commercial, right? [laughs]. 


Dan [00:02:07] Absolutely. 


Kinsey [00:02:07] Well, you know, regardless, I'm excited to chat and kind of talk about what we should expect out of mergers in the coming months and years and kind of parse through some of the themes that we've been talking about lately, both in the Morning Brew newsletter and on this podcast a lot in the past couple of weeks too. 


Kinsey [00:02:22] So like we mentioned, you write a newsletter and host a podcast and you cover kind of all sorts of, I believe the wording is deals and dealmakers, [laughs] in your newsletter. That's not just mergers and acquisitions or M&A, as we'll call it today, venture deals, private equity deals, and everything like that. But when we talk about mergers and acquisitions, they're so often grouped together. Do you feel like that's a fair grouping when we just say kind of M&A broadly? 


Dan [00:02:45] I think a lot of people, when they hear the word merger, they assume it is a so-called merger of equals. A $1 billion company and another $1 billion company get together. But generally speaking, it's, for starters, most deals are actual acquisitions. One is bigger than the other. But even in cases where the two companies have the same nominal value, usually one person gets to be CEO. That's probably from the more important company. So I think mergers and acquisitions, putting them together is pretty fair, because generally it's an acquisition, even if it's officially a merger. 


Kinsey [00:03:15] OK. So there is usually a winner, even if we say merger of equals [laughs] like they said they write about. 


Dan [00:03:20] Yeah, I don't know about winner per se, but kind of the company driving the deal. Take brand name, right. You take two companies and you put them together. Every now and then you combine the name. But one of those names comes first. And that's the source of a lot of negotiation, but that's probably the company that has the most leverage. 


Kinsey [00:03:37] Interesting. It kind of reminds me of [laughs] the saying, there's always a reacher and a settler in every relationship. [laughs] 


Dan [00:03:42] Absolutely. 


Kinsey [00:03:42] Kind of the same could be said for mergers and acquisitions. OK. So if you had to sort of broadly paint the picture here, why companies engage in M&A deals, what is the point? I mean, we say synergies all the time, but is that actually something that happens that, you know, a company joins with another one and suddenly everything gets easier and better and more profitable? 


Dan [00:04:04] Well, that's the goal, but it doesn't always work that way. There's basically two broad categories of mergers, and in the technical world, they call them horizontal and vertical mergers. So horizontal merger, which I think is really the most of them, is a merger in which a company is buying something that could be a product, that could be a whole business unit, that could be a team of people. Sometimes these so-called acqui-hirers, where it's like a group of engineers. The goal in a horizontal merger is to buy something that you don't already have in order to expand your business. 


Dan [00:04:32] Think Amazon buying Whole Foods, for example. It did not have grocery stores. That's a new sort of product for them. And then there's the other kind of mergers, which, as you say, are kind of more synergistic, which sometimes could be considered more anti-competitive, where, say, Amazon were to buy another ecommerce site. Or Facebook buying Instagram, arguably. Both social networks, Facebook already had photo sharing, Instagram added to that. Where you're trying to in part take out a competitor, but maybe think that, oh, wait, that competitor is kind of like us, maybe smaller, but they've got some special sauce we don't have, and that can be a creative [indistinct] our primary product. 


Kinsey [00:05:08] So it's not just always buying something that you can't or that you don't feel like investing enough in to create yourself? 


Dan [00:05:14] I think so, yeah. Or maybe that you think you can't create yourself. Maybe they've got a particularly good head of engineering or a particularly good CEO. And you really believe that that person or that group of people is the difference. So even if you were to create the same product, you know, basically create a knockoff product. It still wouldn't be the same. 


Kinsey [00:05:32] OK. I kind of want to hit on some of them the broader trends at play here. Do we get a lot of these reports from Refinitiv and Dealogic and all these different outlets that say global M&A activity did XYZ in the last month or year or decade? But we recently saw global M&A activity hit $3.9 trillion in 2019, which was down 3% from 2018. But as you wrote, that was still the fourth-largest dollar volume in history, the sixth year in a row the total value was above $3 trillion. How do we make sense of those numbers? What are they kind of mean in context? 


Dan [00:06:07] Generally speaking, when M&A activity and M&A volume is high, that means that companies are pretty bullish on the future and are having kind of the so-called animal spirits. They believe the business environment is good, at least for their particular business, and that things are going to continue to get better, Again, obviously, there are exceptions. There's sometimes distress purchases. You know, M&A, you can buy something, say, out of bankruptcy. But generally high M&A volumes mean that people are pretty confident about the economy. 


Dan [00:06:32] It is worth noting, though, that after that 3.9 trillion last year, January, which we just finished off, had the lowest global M&A total in seven years. And there's a bunch of reasons for that. But a lot of it is regulatory and specifically a fear, not just in the U.S., but in Europe and Asia, that there's going to be additional scrutiny, particularly on big mergers. And that seems to be freaking some people out. On the other end, kind of much more broadly, there is an argument to be made that those in business have a better sense of where business is going. And if they are confident in where business is going, that's probably good both for those who have stocks and who invest in the markets. But also it just generally means the economy is probably on a upward trajectory. 


Kinsey [00:07:12] OK. So should we take that kind of at face value, that if we're seeing a lot of M&A activity, that the average person should expect we're going to kind of continue on this bull market trend that we've been in for the last decade? 


Dan [00:07:23] I mean, yes, until no, right? Which is, you know, go back to 2008, 2009, or really any kind of bust. CEOs and business leaders are always right until they're wrong. [Kinsey laughs] And they're not terribly good at crystal ball gazing. You never take that sort of stuff to the bank. It's simply a good measure of where their sentiment is, not that their sentiment is foolproof. 


Kinsey [00:07:46] OK. International deals have also kind of experienced some change. I was reading that Europe and Asia Pacific, excluding Japan—deal volume fell 25% in Europe and 14% in Asia Pacific and cross-border deals down 25%. Lowest volume in five years. That does not paint a pretty picture for international deal making. 


Dan [00:08:06] No, it doesn't. So Europe is broadly—start with Europe. And that is partially the economic sentiment thing. The bull market, or the kind of all the rosy optimism in the U.S., has not been reflected in Europe over the last couple of years, partially because of Brexit, partially because some other secular issues in Germany and countries like that. So that's part of it. 


Dan [00:08:24] And on the cross-border side, there is increased nationalism, political nationalism in a lot of countries, U.S. included, but certainly also true in Europe and in parts of Asia Pacific, including China. And it is harder right now to get cross-border deals done than it was in the past, particularly if there's any sort of serious technology angle to it. Every country is very concerned about national security and hacking, etc. So any sort of tech angle, cross-border deals can become very hard to get approved. 


Kinsey [00:08:54] So when you say the idea of nationalism, you just mean that people are more inclined—or companies are more inclined—to broker deals with companies that are also based in their home country? 


Dan [00:09:03] No, I mean regulators are more likely to block them. 


Kinsey [00:09:08] Oh, OK, OK. 


Dan [00:09:08] For a variety of reasons. One to be national security, as I said, based on technology. One to be jobs. Again, there's a huge elevator company currently being sold. It's a German elevator company, which sounds boring, but it's an $18 billion deal. We all use elevators, particularly if we live in urban areas. And there's lots of talk about if that company gets bought—it's based in Germany—if it gets bought by a company in Finland, which is the leading bidder right now, what that will mean for jobs in Germany? 


Dan [00:09:34] And that could be a reason it gets blocked. Simply this idea that too many jobs in German home country would disappear. Thus German regulators, in theory, could block it. And that's a reason why the company might choose, say, a U.S. private equity firm instead, which would keep the jobs in Germany. 


Kinsey [00:09:50] OK. And this idea of private equity deals—this is something I wanted to kind of pick your brain about as well. The difference between something like Amazon buying Whole Foods and a private equity company buying another company to kind of hold it. How should we think about the difference between those two kinds of deals and context in kind of today's market? 


Dan [00:10:09] They have two very different goals. And certainly, for example, when it comes to U.S. grocery, Albertsons is owned by private equity. Lots of grocery chains are owned by private equity. Generally private equity, when they buy something, they're financial investors. They are buying something for the purpose of selling it later, usually years later, at a profit. That is their goal. Now to do that, they obviously want the company to become better. They want it to become more valuable. They want it to generate more revenue. They don't buy things to kill them. They buy things to grow them. 


Dan [00:10:36] They're just not always so great at it. When Amazon is trying to buy something, it is doing it to kind of hold it, probably forever, and to integrate it into a larger business. No company thinks that it is going to go away in five years, 10 years, or 20 years, even though very few companies survive 20 years. They're buying Whole Foods to become a big part of Amazon. If a private equity firm had bought Whole Foods, and some of them kicked the tires on it, they would've been buying it to probably sell it by now. 


Kinsey [00:11:00] Interesting. OK. So we'll talk more about these deals and contacts and also the regulatory issues that Dan has brought up in just a second. But really quickly, let's take a short break to hear from our partner. — And now back to the conversation on M&A with Dan Primack. And if you are liking the conversation so far, go check out our newsletter coverage at MorningBrew.com to see all of our merger week content. 


Kinsey [00:11:23] So, Dan, we kind of started this conversation talking about 2019 deal totals. And one of the big numbers that stuck out to me was the share of deals that were megadeals, or these kind of giant companies buying giant companies, represented 31% of the global total, which was the largest percentage of the global total since 2015, which was also a [chuckles] pretty busy year for M&A, if anybody was reading the beginnings of Morning Brew back then. But it kind of brings to mind why we care about megadeals. What counts as a megadeal? How does it qualify as a so-called megadeal, and why should we care? 


Dan [00:11:57] So there's two things. One, you know, a lot of these deals are being done by private equity firms. And private equity right now is sitting on a record amount of what the industry calls dry powder, which is uninvested capital. In other words, they've raised these massive, massive funds from investors and now they need to put the money to work. And again, they've got more of it than they've ever had before. So that's one of the things driving megadeals. 


Dan [00:12:17] The other thing is you've had very, very high—you've had this bull market that's been going on for a decade-plus now. You had a huge run of stock buybacks over the past, kind of 12 months, in part due to the Trump tax cuts, the corporate tax cuts. So companies have a lot more, basically, money to do deals and a lot more currency. And the final piece of that, and we've seen this a little bit in earnings over the past couple of quarters, some of these big companies, once you get to a certain size, it is hard to maintain your growth rates. It's very hard to do that.  


Dan [00:12:49] It's easy a startup to have 200% growth every year because you're starting from small numbers. When you start from big numbers, it's harder. So if you can bring in a massive revenue generator, that can help kind of boost your numbers. 


Kinsey [00:13:03] OK. So let's kind of break this down a little bit. When we talk about stock buybacks, explain a little bit how that gives company enough money to kind of broker these sort of giant deals. 


Dan [00:13:11] Sure. Companies can buy other companies with one of two things, cash or stock. And also, by the way, debt. They can raise debt, which turns into cash. But cash or stock, and often a combination of the two. You'll see company A buys company B for $1 billion. 30% of it is cash, 70% of it's stock. The more stock a company has of its own stock, the more stock it has to use in an acquisition. It's kind of just like another piece of currency. And the higher value that stock is, as I said, we've been in a bull market, so a lot of companies have very highly valued stock, the more that currency is worth. 


Kinsey [00:13:45]  OK. We talk about these megadeals and even just sort of chatting about this last couple of minutes, I feel like there are a number of red flags popping up, [laughs] speed bumps actually closing these deals. And let's start with what you just talked about. We talked about these stock prices are super-high. We've been in a bull market for 10 years. Evaluations are through the roof. Do you see that as prohibitive for buyers who are looking to buy a company right now, or does that just kind of incentivize people to act now? 


Dan [00:14:13] It should be prohibitive. You know, private equity folks talk constantly about how the prices are too high. Regular strategic choirs talk about it constantly and they complain about it. And then they all go out and do deals, in part because on the private equity side, they are paid to do deals. If they don't do deals, they don't really get paid as much. And on the acquire side, you know, the people who are really doing the transactions are these corporate development M&A folks within these companies. Same thing. They get paid to do deals. 


Dan [00:14:39] So, yes, things are expensive. People keep buying them. There is, however, and it's worth noting, if you go back through history, 10 years, 20 years, 30 years, 40 years, deals that get done kind of near-market peaks generally don't do too well. The most obvious and highest profile example, of the internet age, was the AOL-Time Warner merger, which was this huge, massive deal, kind of right before the internet bubble—the dot-com bubble burst in 2000. And it was a disastrous deal. Lots of these deals don't work. 


Dan [00:15:08] Look, General Electric, which became this massive conglomerate—it spent the last four years selling off things that it bought. You'll see this. But right now, you know, folks do get paid to do deals. It's probably a bad idea if you're looking at it from the outside or as an academic, but it's not necessarily going to stop folks from doing it. Regulatory challenges will stop you from doing it because then it becomes more headache than it's worth. But just high prices alone won't do it. 


Kinsey [00:15:32] OK. So when we talk about these regulatory headaches, they have kind of become part of the norm in a lot of these megadeals—that we just kind of expect there to be some sort of antitrust pushback. Explain to me what, if you had to say in a sentence, what the sort of landscape of antitrust regulation looks like right now, at least in the United States, what would you say? 


Dan [00:15:53] Unpredictable. 


Kinsey [00:15:53] Unpredictable. 


Dan [00:15:53] Very unpredictable. 


Kinsey [00:15:55] OK. 


Dan [00:15:56] Yeah, there's no great rhyme or reason now why certain deals get lots of scrutiny and others don't. Again, with the exception of certain kind of Chinese technology companies, and we all understand kind of the national security reasons for why those are under greater scrutiny. 


Kinsey [00:16:09] OK. It brings to mind, I very recently found out that the FTC is suing to block Edgewell, which makes Schick razors, from its almost $1.4 billion acquisition of Harry's, the razor startup. That kind [laughs] of seems like why are regulators so focused on personal care startups when they could be thinking about things like breaking up big tech? Why is that the concern? 


Dan [00:16:33] Well, the FTC is concerned with lots of things. They try to block lots of things. Yeah. This one's weird, though, because remember, they allowed Unilever, what, three years ago now, to buy Dollar Shave Club — 


Kinsey [00:16:42] Right, right. 


Dan [00:16:42] Which was the main competitor to Harry's. They didn't raise any red flags with that. There's another smaller deal out there. Procter & Gamble, which makes Gillette razors, is buying something called Billie, which is a much smaller womens-focused razor company, much smaller than Harry's. Their argument, from reading their complaint, is that they think there is a duopoly between Procter & Gamble and Edgewell, and that Harry's, by acquiring Harry's, Edgewell is going to remove the incentive to lower prices and to innovate. 


Dan [00:17:10] It is a weird argument. It ignores all sorts of things, including other razor companies out there, like, for example, Bic, which is neither owned by Procter & Gamble nor Edgewell, but is all over the place and is even making a connected razor, which may sound stupid, but it's certainly innovative. And also the FTC recently, last month or maybe, yeah, last month, they lost a case trying to block two hydrogen peroxide makers from merging, which sounds super-boring. But the fact that they lost that in court, that was the FTC's first loss on something like this in over a decade, which means you can almost expect that to embolden Edgewell and Harry's to fight this in court. 


Kinsey [00:17:48] Interesting. So the FTC doesn't frequently lose, but because it did, that will embolden them to sue or to appeal whatever is right. 


Dan [00:17:57] I think so. I think so. I think Edgewell and Harry's think they have a good case regardless of the hydrogen peroxide thing. But the fact that the FTC just lost, again, how often do you want to go up against City Hall when City Hall has not lost in over 10 years? The fact that they just lost, I think that's going to make them kind of push a little bit more to try to get this deal done. 


Kinsey [00:18:13] So let's say, hypothetically, that the FTC succeeded in blocking this deal. What happens for Harry's? I mean, what's the logistics [laughs] of the fallout here? 


Dan [00:18:22] Well, it's a mess. It's a mess for a couple of reasons. The first is just kind of a momentum thing. This deal first got announced last May. So, whatever that is now—seven, eight months ago at this point—and even though the two companies haven't been officially combined, they're constantly talking about what they're going to do when the final ink is dry on the paperwork. And the guys who run Harry's were gonna be put in charge of all of Edgewell's personal care business. Also, that includes, like, Hawaiian Tropic. 


Dan [00:18:48] So there's lots of synergies that are being built in and conversations being had that will have been a big waste of time. Now, Harry's itself, I am told, even though they're not public, I am told it's profitable, so they can survive this from day-to-day basis. They don't need to be taken out. But this really probably means they can't be acquired, except unless there is some company out there that doesn't do anything right now in the shaving products category that wants to get into it. So that probably means for Harry's, they have to start preparing to go public. It's a major, major change internally for how they would have to be thinking about their own future. 


Kinsey [00:19:20] Do you think the option to go public would be different if they weren't profitable? 


Dan [00:19:25] Yeah, it would be harder. It would be much harder. We're going to see Casper trying to go public direct to consumer companies, which Harry's mostly is, even though it is in physical retailers. It can be a hard thing right now to go public. But Harry's being profitable, I think it could be a successful public company, probably. But again, I'm on the outside looking in. I know they are profitable, but beyond that, I have no idea what the size of their business truly is. And look, $1.37 billion is a nice sale price. It's not a huge company as a public company, so they could have some kind of volume problems. 


Kinsey [00:19:58] OK. So let's kind of zoom out here for a second and think about the international antitrust landscape. Obviously, there are different bodies governing different countries. We have the FTC and the Department of Justice here in the United States who kind of handle, most of primarily, though, the responsibility for antitrust regulation. In the EU, it's an entirely different beast. 


Kinsey [00:20:18] We've seen a lot more fines handed down from the EU in recent months, I would argue, at least as it pertains to tech, than in the U.S., and they kind of seem to have the most—and we call them antitrust busters—how do we think about international antitrust regulation if we're covering tech or something like that here in the United States? 


Dan [00:20:37] It's harsher. And, by the way, not just the EU. Also, now that Brexit is done, the U.K. [indistinct]. Yeah, it's stricter. They care more. Again, they take labor into account a lot more. Here in the U.S., when it comes to a deal, we generally—not always—we generally care mostly about the consumer. Is this going to raise prices or lower prices for the consumer? That's certainly the case in Edgewell-Harry's. That's what they argue. That is the argue that some attorneys generals are making trying to block the Sprint-T-Mobile U.S. merger. It's all about, kind of, what happens to the consumer. In the U.K., they care about a much broader swath of things, including a much greater focus on labor and who's going to lose their jobs and how many. 


Kinsey [00:21:17] OK. When we think about the kind of consumer focus here in the U.S., that in large part is based on laws that were written a very long time ago, in the turn of the 20th century. [laughs] These were railroad companies. We talk about Sherman Antitrust Act and things like that. This was a very long time ago. We've talked about this on this podcast before. When do you think we'll see meaningful change in the way that antitrust is executed in the United States? 


Dan [00:21:44] God, it should have been years ago. So, God forgive me, I predicted Congress will actually do [Kinsey laughs] something smart and actually do something comprehensive. I don't see it. 


Dan [00:21:55] You know, really what we get is new White Houses, different administrations every four or eight years that interpret these things differently. They either tend to let everything through or they block a lot of things. And then sometimes industry-specific. I just don't see any push for there to be a real conversation about what antitrust should look like, particularly in kind of this digital internet age. I think instead what we're going to get is these one-offs. You know, we hear that DOJ and FTC are investigating, for example, Google and Amazon and Apple and Facebook. 


Dan [00:22:26] Those are kind of one-off things. Those aren't real structural looks at lots of industries beyond big tech, that had become consolidated. They'd become virtual monopolies. I just don't see any move towards it. And candidly, it's partially because it's not that it's not a winning political issue, it's just one that I don't think people on the stump care about. And you haven't heard the presidential candidates on the Democratic side and there's, what, like 380 of them still? [Kinsey laughs] You haven't heard any of them really talking about this outside of big tech. 


Kinsey [00:22:54] Yeah. And that's a perfect segue [laughs] to me wanting to talk about politics in 2020. But like I was going to bring up, Elizabeth Warren made a name for herself early on for kind of the people who maybe aren't as interested in politics in general by talking about breaking up big tech. This has been one of her big points from the very beginning. But to me, it's tough because that's such a backward-looking strategy. These are companies that have already come together. The deals have already been done. And they passed antitrust regulator scrutiny the first time around. 


Kinsey [00:23:25] I'm more interested in what they're going to do to change that so that it doesn't happen again. So if you're kind of looking at the 20/20 field, who do you see as the person who's most capable of making that happen? Is it possible to pick someone right now? 


Dan [00:23:37] I think most capable is probably Warren, just cause she's the one who cares about it the most. She's also got this big policy, this private equity policy, which candidly, if it were actually passed in full—and candidates never get their bills passed in full when they become president—if it were, it would basically end the private equity and street, at least as we know it. The [indistinct] private equity industry, just because of some of the liabilities it would put on it. Warren's probably the one just because she cares about at the most. 


Dan [00:24:01] But again, I don't think any of them will really get something done. It's worth noting, though, that just because a merger was approved, even if it was approved years ago, technically, theoretically, DOJ or FTC or FCC can look back and unwind something that they said yes to the first time around. It is hard. It is a guaranteed court challenge, but you can theoretically do it. 


Kinsey [00:24:23] Right. And that's one of the big arguments that Facebook at least has made, or that critics of Facebook have made, is that Instagram survived very well on its own. We could easily unravel that deal and they would be fine and people would still have jobs. 


Dan [00:24:37] I'll say two things about that. One. Facebook, though, at the same time, on the back end, is integrating all of its platforms. [indistinct crosstalk] They're trying to make it harder to unwind it. They're hoping to be able to go into court in two years and say, guys, you want us to unwind Instagram, but look how hard it would be because we basically nailed it together. So that's one thing. And that's the biggest piece of it. I have another thing to say, but I can't remember what it is, so we'll move on. 


Kinsey [00:25:02] [laughs] That is OK. OK. So we spend a lot of time talking about tech when we think about making big deals, because obviously these are the sexy ones and the ones that we're using all the time and thinking about the most. But there is a lot of consolidation happening in other industries and we've seen it in payments, in media, and a lot of other. [indistinct crosstalk] What, industry-wise, do you think is the next big spot for consolidation—that we're going to see a lot of these deals happening? 


Dan [00:25:27] I mean, the one obvious place is streaming, you know, media. Like the whole idea of Netflix and Disney Plus and Hulu and all of those was that people didn't want to have cable bundles anymore because we were paying a lot for stuff we weren't watching necessarily. And wow, my cable bill suddenly, you know, $150 a year. Well, if you want all these streaming services, your bill is now probably more than that. And so I do think at some point, not soon, but the next couple years, you're going probably see some sort of consolidation, or at least partnerships, in that space. 


Kinsey [00:25:58] OK. We're going to take a short break to hear from our partner and when we get back, I've got a very interesting game for you to play. —


Kinsey [00:26:06] And now back to the conversation on M&A with Dan Primack. All right, Dan, so I said just before the break that I had a game to play. I ran a poll — 


Dan [00:26:15] I like games. 


Kinsey [00:26:15] Awesome. Good. I'm glad. I ran a poll on my Instagram asking people for questions about this episode, what they wanted to hear about when it came to mergers and acquisitions. And the answers were, I will say, interesting. [laughs] To say the least. I'm gonna run through a couple of them, and I want to hear your perspective. So one that I got actually a couple of times was Netflix buys Spotify. Do you think it would happen and would it be a good deal? 


Dan [00:26:40] I don't—well, I don't know if it will happen. Netflix has a [laughs]—Netflix hasn't really ever bought anything big before. It's not really what it tends to do. I don't see that really. Netflix is very much a video-focused company. It's always been a video-focused company, even when it was sending out DVDs via the mail. I don't see it getting into strictly audio. I'm not quite sure what that does for Spotify's business. 


Kinsey [00:27:04] OK, that's fair. So this was another interesting one that I actually got more than one time as well. Apple buys Tesla. 


Dan [00:27:11] Yeah. 


Kinsey [00:27:12] And then there were a couple addendums to that one. [laughs] But let's just start with Apple buys Tesla and then we'll do the add-ons that people sent. 


Dan [00:27:18] Well, let's start with this would've been a lot more likely six months ago. I don't know exactly when this is airing, but Tesla's stock has been on a roll. On—what was it—on Tuesday, the 2nd or the 3rd, it added $23 billion in market cap in a day. I mean, think about that. Its stock went up and added $23 billion in market cap in a day and the following day, another double-digit billion ad. So even for Apple, which has tons of money, it's extremely expensive. I just honestly don't see it. 


Dan [00:27:47] Apple has not really moved into that sort of space. And ultimately, Tesla is Elon Musk. And it's hard to see Elon Musk having to report to somebody, whether it be Tim Cook or anybody else. 


Kinsey [00:27:58] Right. And that — 


Dan [00:27:58] The idea of Apple buying Tesla has been floated for years. 


Kinsey [00:28:01] Yes. Yeah. And that was one of the big points that a couple of people said, was that Elon Musk would have to stay CEO. But I think it's interesting that people were talking about an iOS car—that seems like not that far out of the realm of possibilities, given what Apple does. [laughs]


Dan [00:28:16] No, absolutely not. And I will say about Apple, at some point, Apple needs another game-changing piece of hardware. It's been a while since the iPad, which was the last one. I don't think the watch really counts. It's a nice niche product, but it's a niche product. You know, iPad, iPhone, iPod. You know, before that, laptops. It's been a while since they've had something truly brand-new that looks different than everything else. 


Kinsey [00:28:38] OK. And I also want to talk about one deal that's already happened. The Barstool and Penn National Deal got a ton of attention. People were really into this when we wrote about it in Morning Brew. What's your take? 


Dan [00:28:49] My take is, first of all, it's a hell of a return for the people who invested in Barstool a couple of years ago. I think—I'm saying this off the top my head—they invested at a valuation of about $15 million. And now the implied valuation is $450 million. So it's a hell of a return. This makes sense for both sides. For Barstool, it makes sense because [laughs] [indistinct] people who don't work well with others. [Kinsey laughs] Barstool would have a very, very hard time living within a larger media organization. 


Dan [00:29:16] And usually media startups, if they're going to sell, they sell to bigger media groups. Barstool had a partnership at one point with ESPN. That went away because they didn't play well with others. So they had to go somewhere else. And so you go to Penn Gaming, which is a casino operator essentially. For Penn Gaming, they're really trying to expand their digital offering of sports betting, which, you know, the Supreme Court legalized recently. Lots of states have started to legalize it specifically. This gives them the tech platform and kind of a built-in audience. 


Dan [00:29:42] So I think it makes sense for both sides. And by the way, for Penn National, I haven't followed since this, but the day they announced the deal, their stock went up so much that theoretically, it paid for itself. 


Kinsey [00:29:53] Well, I think it helps when Dave Portnoy says go buy this stuff. [laughs]


Dan [00:29:57] Absolutely. Dave Portnoy, who's the—not the CEO, but the founder and kind of titular head of Barstool. Also the person who again, it would be very hard for him to fit inside a media organization. 


Kinsey [00:30:08] So let's talk about some of these other deals. You know, kind of finishing our Kinsey runs an Instagram poll game. Other deals that have happened recently. And we kind of touched on this with the Edgewell-Harry's conversation. But we get some of these giant companies that are brand names, that have been around for a generation or more, buying a startup or buying a majority stake in a startup. One that we've talked about a ton in the past couple of months is Altria buying a stake in Juul that ended up terribly. [laughs] 


Dan [00:30:38] It's not going well. 


Kinsey [00:30:40] I think, what you'd call it, one of the worst strategic investments in memory. 


Dan [00:30:44] Yeah. [indistinct crosstalk] Yeah. Just in the amount of value that's lost. As I said, sometimes these deals ultimately don't work or collapse. But it is rare for a strategic acquirer, and again, it bought like a 35% stake, to have to write down the value of a deal by this much this fast. I mean, they've written it down, I think by like $8 billion or $7.5 dollars in six months. It's extraordinary. It's a few things. One. Don't buy into a business that's about to be severely regulated by the government and sued by absolutely everybody. 


Dan [00:31:15] If you look at the write-downs and their explanations for the write-downs, it's pending litigation and the prospect of more litigation. They're just afraid they're going to get sued to death. This was a dumb deal on both sides for everyone from the beginning. I mean, it made sense for some of the early employees and founders of Juul because they got a lot of cash out of it. So they're in the money, no matter what happens. But from a strategic perspective, Juul was always arguing that the benefit of Juul was that it was getting people off of cigarettes. 


Dan [00:31:44] Yes, some teenagers might start getting addicted to nicotine, but we were getting people off cigarettes. Cigarettes are what causes lung cancer. Then they let the company that makes Marlboro buy a big piece of them. It destroyed their—anyone who worked at Juul that didn't think it was an evil company, that thought it had some sort of noble mission, was absolutely undercut by that. And again, financially, it's been a mess. You know, U.S. cigarette makers are in trouble anyway. Altria is in trouble anyway. This did not help. 


Kinsey [00:32:11] So if you can make kind of [laughs] a very logical conclusion, how come no one in the room at the time could do that? Why did this deal happen? 


Dan [00:32:19] I think it happened to Juul because, as I said, people got paid. People got rich. It is very hard. And look, it's hard to blame [indistinct], right? It is very hard to look at millions, tens of millions, hundreds of millions of dollars being offered by somebody and say no to that. That's just a really hard, and tried too hard to ask most people to do. 


Kinsey [00:32:36] Do you think it's indicative of any sort of broader trends when it comes to these sort of giant strategic investments from an old-school company buying into a younger, more kind of like sexy startup type? 


Dan [00:32:47] Yeah, well, it definitely reflects, you know, everyone does it differently and some people do it well, some people do it badly. We started the show by saying why do companies buy other companies? And one reason is often because that other company has something they don't, which could be a product. It could be an ethos. It could be an understanding of the market. It could be a CEO. 


Dan [00:33:05] You know, Walmart bought, possibly years ago, something called Jet.com, which is kind of like a discount shopping site that most people hadn't heard of. It raised a lot of venture capital money. They paid like $2.5 billion for it. They weren't trying to buy Jet.com, which technically still exists. They were trying to buy its founder and CEO, a guy named Marc Lore, who had founded Diapers.com before. They paid a lot of money, basically for a guy. And it's arguably paid off. He took over Walmart's digital online strategy, ecommerce strategy, and it's done much, much better under him. With Juul and Altria, Altria, as I said, grabbed the life raft. It hasn't worked. 


Dan [00:33:39] The biggest thing when you do these deals is arguably outside of regulatory risks. With vaping, it's cultural fit. If you're a big, lumbering, legacy company and you buy a startup who generally their culture is to move fast and not worry about tradition, can you meld those two or just become a culture clash that brings everybody down with it? 


Kinsey [00:34:01] There's a reason we're kind of pegging this whole merger week that we're doing at Morning Brew to Valentine's Day, that this is you could draw comparisons, that this is like two people getting together and getting married and 50% [laughs] of marriages end in divorce. But it's kind of, you know, makes you think this is a product of emotion to these deals. You have to kind of vibe with the person, and that's not necessarily something that antitrust law will answer or that any number of these more tangible, concrete things that we've talked about can do anything about. You just have to like the person that you're going to end up working with and like the culture that whatever company you're bringing in or that you're merging with kind of has from day one. 


Dan [00:34:41] Yeah, absolutely. Anytime there's a merger, proposed merger, you know, bank analysts come out and say, OK, look at this. There's this product to this revenue line and they indistinct] buying these supply chains. And there's synergy. All that stuff can be true. And if none of that's true, by the way, great culture won't save you either, right, because there's got to be a good business decision to do a merger. But even if all those things are satisfied and it looks great on paper, it still has to work. 


Dan [00:35:05] Look, think about like sports, right? I'm a Boston Celtics fan. We had a guy over the last couple years named Kyrie Irving playing point guard, all-world player, really good player. He did not fit in the locker room. The team was worse when he played with them. Shouldn't have been. On paper it made sense. But when he was there, it was worse. He's now not there anymore. The team is better. It doesn't make a lot of sense, but it's because he was kind of a cancer in the locker room, it seems, or didn't meld with people on the court. It's the same thing in business. These companies have to work well together. Employees on both sides have to buy in. 


Kinsey [00:35:37] Do you think it was because Kyrie Irving was a flat earther? 


Dan [00:35:40] It could very well [Kinsey laughs] be because he's a flat earther. He's a strange human being. 


Kinsey [00:35:44] You never know. [laughs] OK. So we've answered a lot of these big questions, kind of taken on some giant themes here. We are now going to bring out the wheel. Like I mentioned at the top of the episode, this is an episode we are recording remote. So I'm going to spin our wheel for you. We'll give you a question and you hopefully give me an answer. Sound good? 


Dan [00:36:01] Got it. Sounds good. 


Kinsey [00:36:02] All right. I'm taking it for a spin. [sound of wheel spinning] [sound of a ding] All right. We landed on Follow for Follow. This is a good one. So, you're pretty active on Twitter. 


Dan [00:36:12] Yeah. 


Kinsey [00:36:12] Who is your favorite person to follow on Twitter? 


Dan [00:36:16] Oh, boy, my favorite person to follow on Twitter. That's a really good question. I'm going to give three, I think. 


Kinsey [00:36:24] Perfect. 


Dan [00:36:24] Covering venture capital stuff, he's kind of an old-school venture capitalist. He's been doing it forever. But Fred Wilson, who I think, tweets it at @avc. He's just one of the smartest people in the industry. He's been doing it forever. He has had failures and successes. He's also kind of a prolific blogger. And years ago, the first-ever podcast I think I did, before they were even called podcasts, I suggested he was wasting his time as a blogger. Then he invested in things like Twitter. So I was wrong. [Kinsey laughs]


Dan [00:36:51] I'm going to an Axios person, who is Felix Salmon, who's one of our financial reporters, @FelixSalmon. His little avatar looks like Felix the Cat. Mostly because he often tweets things I disagree with, which leads to really good disagreements within the office, which I like, a lot. Oh, I had a third. I'm gonna go with two. I'm sure there's a third. 


Kinsey [00:37:13] OK. 


Dan [00:37:13] I'm trying to think. I unfortunately follow way, way too many people on Twitter. It's not a good habit. 


Kinsey [00:37:18] Yeah. [laughs] The follow inflation is a real thing. 


Dan [00:37:23] It's a very real thing. 


Kinsey [00:37:23] If you think of anybody else, you can let me know. I'll put it the show notes. [indistinct talk from Dan]


Kinsey [00:37:25] OK. [laughs] OK. We're going to take another spin around the wheel here. [sound of wheel spinning] And [sound of a ding] all right, we landed on, Oh, Shit. This is a fun one. So what's the time in your career that's kind of been an oh, shit moment for you. Either a good way or a bad way. You realized something was gonna change. You realized you messed up and you kind of sat back and said, oh, shit. 


Dan [00:37:47] To answer this, one, I sent a daily newsletter every single day [Kinsey laughs] and I'm the one who literally hits send on it. And unlike a tweet, which you can delete or even a news story online, which you can edit or if you have to, pull it down, certainly put a correction on, or podcast, which you can edit even after you post it. You can post-edit it if you screwed something up. A newsletter, email newsletter, once it sent out, that's it. It never comes back. 


Dan [00:38:10] You can send out a correction later, but that is static. It lives there forever. 


Kinsey [00:38:14] Oh yeah. We are familiar with the panic. [laughs]


Dan [00:38:17] Yeah. So I have oh, shit moments on a pretty regular basis, usually small little typos. The other day I led with a story about Jess J E S S Bezos. I got lots [Kinsey laughs] of email about that. Excited that Jeff's sister was so successful. That's my big oh, shit moment on a daily basis. A broader basis in my career—years ago, a venture capital firm was convinced I had hacked into their system and tried to stick the Massachusetts State Attorney General on me. That was no fun. That's six months out of my life. 


Kinsey [00:38:45] So that's insane. I think that's the craziest answer we've gotten to oh, shit on this podcast. 


Dan [00:38:50] It wasn't good. From like whatever it is, 2005, my desktop computer from back then—still I believe lives in a corporate law office in downtown Boston in a closet somewhere just in case it ever gets needed. 


Kinsey [00:39:00] Wow. You must be great at like break-the-ice games. You've got a really good random story there. 


Dan [00:39:06] There you go. It is what it is. It wasn't fun at the time. [laughter]


Kinsey [00:39:09] All right. One less spin around the wheel. [sound of a wheel spinning] [sound of a ding] All right. The One Thing. So what's the one thing, it could be a quote, a book, a movie, a song, an album, anything. The one thing that you feel like, or even a person, has had an outsized impact on your life in your career. 


Dan [00:39:28] Outsized impact. I'm gonna say the first person who hired me to do any of this stuff for a living, so there was a guy named Adam [indistinct], who was in media—he's doing something else now, I don't know what—but so, I was 23 years old. I'd gotten out of college. I followed a girl to New York City and knew I wanted to write for a living. I'd run a small community paper in Boston years ago. And so I applied everywhere, to entertainment, sports, business news, politics—didn't matter. I just needed a job to pay for the tiny apartment with the shower stall in the kitchen. [Kinsey laughs] 


Dan [00:40:00] And Adam hired me explicitly—not so much cause I was a great writer, reporter—but so he hired me for a business trade publication because I had just been a deputy press secretary on a congressional campaign, where the candidate had been very, very rich. And Adam's thinking was that he kept hiring cub reporters, for you know, 30 grand a year, who had to interview millionaires and billionaires, and the power differential screwed those conversations up. So his thinking was, because I had been working hand-in-love with a rich person, I would be able to interview rich people and not get cowed by them. So I'll give Adam credit, because if he didn't hire me for that first job, I wouldn't ever be doing any of this. 


Kinsey [00:40:35] So it worked out. You're not afraid of rich people? 


Dan [00:40:37] Not afraid of rich people at all; it all worked out. 


Kinsey [00:40:39] [laughs] Good to know. OK, Dan, thank you so much for joining me. It was great to get to talk to you. I feel like I learned a ton and I'm really grateful that you took the time to come on Business Casual. 


Dan [00:40:48] Thanks for having me. 


Kinsey [00:40:51] Thank you so much for listening to this week's episode of Business Casual with the incredible and very intelligent Dan Primack from Axios. If you liked what you heard in this episode, go check out Morning Brew's Merger Week content. We're doing a ton of really cool stories all week long about why mergers happen, when they happen, how they happen, and sometimes when they do fall apart. So go check it out. Subscribe to Morning Brew's newsletter at morningbrew.com and see all the cool stuff we're doing. Next week on the show, I am interviewing Jason Fried, the CEO of Basecamp. 


Kinsey [00:41:22] So Basecamp's whole thing is that everybody should work remotely, which sounds pretty good, right? Well, maybe not. We'll figure it out. And I will see you on Tuesday. [sound of a ding]