Deals Gone Bad - Some of the worst M&A in the game

Hey everyone,

Glad to be back writing after a brief summer hiatus from the last post in early July where I talked about some of the best deals/investments made during the bottom of the 2009 Great Financial Crisis. This time around, I’m going to take a different approach, and cover 12 of the worst, mistimed M&A deals over the past couple of decades.

Another note - Recently, I made the decision to convert the “HighYieldIntern" account into an account focused on my Newsletter. There’s two reasons for this. 1) Although I joke around and satirize a ton, I also want to provide value and information helpful for other people that are super into finance like me. Additionally, Instagram is a dying platform and it’s unfortunately time to think about other places to provide content. Maybe I’ll write about what’s going wrong with Insta and the FinMeme space later on. 2) I’m getting a bit older and don’t think I have it in me to make intern jokes as often anymore.

Ultimately, I’m amped to be zoning in more on the newsletter. It’s certainly a little harder to find the time to write given work + interests outside of work, but trust me I’ve got a lot of interesting things to write about for y’all over the coming months. I’m looking forward to diving more into the newsletter and will spoil that an upcoming newsletter will cover my favorite books. These are mainly finance books, with some more “philosophical” books sprinkled in there too.

Now let’s get to today’s read - A FinTwit account highlighted some of the best M&A deals in the U.S. in recent memory. Naturally, as a pessimistic credit bro, I had to ask which M&A deals were the worst. As usual, I posed an open ended question to the Twitter timeline and got a ton of really insightful thoughts.

I dived deeper on what Twitter had to say, and a took a look at 12 M&A deals that went south:

1) AT&T buying DirecTV ($67B):

This deal shockingly went from a $67B valuation to $15B in five years!!! There's some serious value destruction here, and my boy MasaSon initially laid out the timeline on what went down. In 2014, telecom giant AT&T announced they would acquire pay TV provider, DirecTV, and create a “unique new competitor with unprecedented capabilities in mobility, video, and broadband services." The initial $67B AT&T deal was financed by $34B in AT&T stock, $14.5B in cash, and $19B in net debt at a 7.7x EV/2014E EBITDA multiple and a 30% premium to where DirecTV was trading at the time. DirecTV’s 2013 EBITDA at the time was $8B.

The deal came at a time where DirecTV was already starting to lose subs as people cut the cord and streaming continued to gain in popularity. Within four years, AT&T lost almost 10mm subscribers, with premium service subscribers decreasing from >$25mm to $15.4mm through 1H21. Part of this was driven by DirecTV being meaningfully more expensive than other cable providers, making it much easier for customers to cut the cord. AT&T also launched and overinvested in “DirecTV Now”, their answer to competition from Sling TV, driving losses given the lower price point and helping cannibalize the core and much more profitable DirecTV business. By January 2021, AT&T had recorded a $15.5B impairment charge on DirecTV’s value.

Where the deal ended up: In August 2021, AT&T completed the spin off DirecTV at a $16.25B valuation, a 4.1x EV/EBITDA multiple on $4B of 2020 EBITDA. AT&T retained a 70% stake, while well-known PE shop, TPG, took a 30% stake for $1.8B. AT&T received $7B in cash in conjunction with the spinoff, using it to pay down part of their, at the time, $180B of debt. While AT&T has kept the financial engineering gravy train going through spinning out HBO through a merger with Discovery, the equity continues to struggle:

2) Twitter buying Vine ($30mm) - mainly for their decision to shut it down while Snapchat and TikTok were able to thrive.

First this looked absurd once Snapchat started gaining popularity among high school/college students, then this looked like one of the worst instances of shareholder value destruction when Tik Tok blew up and changed the way even titans like Meta and Google operate.

This could’ve been one of the best acquisitions in the game – with Twitter buying Vine, a short form (six second) video social platform, for $30mm in 2012. However, Vine was unfortunately struggling to grow its user base or find ways to increase revenue. Of course, this sounds wild in hindsight given the advertising between posts/stories we regularly see on social media apps. Additionally, content creators were having a hard time monetizing the app, driving them to leave Vine for more favorable apps like Instagram and YouTube. Ultimately, Jack Dorsey and the Twitter team elected to focus on the core business rather than manage two apps and right-size the Company. The Vine app was subsequently shut down in 2017, despite having a solid 200mm active users back in December 2015.

While Twitter didn’t end up spending significantly on the app, they clearly missed the boat on creating significant shareholder value. But hey, at least Twitter may get to force a guy who doesn’t want to buy the Company to fulfill his end of a merger agreement. To rub it in further, as of July 2022, ByteDance, the owner of TikTok, is valued at $300B. Pain.

3) AOL and Time Warner ($165B):

In January 2000 (probably the worst time to buy a company), AOL, the American online service provider, and cable giant Time Warner announced their plans to merge for $165B. Ofc, this was at the height of the tech bubble and AOL’s expertise on growing an internet media platform did not translate to running the cable and internet provider. While they once had a combined value of $360B, the stock quicky lost 75% of its value. In 2002, AOL took a massive $99B goodwill hit. AOL fell apart over the next two decades, with AOL spun off from Time Warner in 2009 at a $3.2B valuation, AOL selling to Verizon in 2015 for $4.4B, and then being sold as part of Yahoo to Apollo for $5B in 2021.

4) Yahoo (buying Tumblr for $1.1B and then Verizon buying them):

In May 2013, Yahoo agreed to buy social networking company Tumblr for $1.1B. Once this was announced, Yahoo CEO Marissa Mayer wrote an essay on Tumblr vowing “not to screw it up”. Two years later, it was pretty screwed. Tumblr had seen an employee exodus and were struggling to turn a profit. Tumblr struggled to gain as much impression share compared to Facebook, Twitter, Snapchat and Reddit and their platform wasn’t originally built to be easily monetized. When the Tumblr team couldn’t hit an overly aggressive sales target, Yahoo stepped back and wrote off $712mm in goodwill. Within six years, in 2019, Tumblr was acquired by the owner of WordPress.com for a measly $3mm!!!!

Verizon stepped in during 2017 to buy Yahoo for $4.4B, but couldn’t stop the valuation slide. As mentioned above – both Yahoo and AOL ended up being sold for a combined $5B to Apollo in 2021.

5) Altria acquiring a 35% stake in Juul for $12.8B:

In December 2018, Juul received a $12.8B investment from tobacco giant Altria. At first, this made a lot of sense. Every college kid and 20-something you knew was ripping Juuls like no tomorrow. Juul had a whopping 75% of the e-cig market in a matter of three years.

To an extent too, Altria viewed Juul as a disruptive force that could significantly take share away from cig consumption, so taking a position to capture some of the upside and avoid share loss made sense from that lens. At this peak – Juul was worth a fresh $38B with $2B in revenue, making Juul at the time one of the most valuable startups in the world at the time! There was naturally some skepticism, as the “candy-ization” of smoking was starting to draw regulatory ire. The FDA, led by Scott Gottlieb at the time, were zoning in on how to regulate Juul and other vape gods. At the time, the FDA was warning Juul to change their practices so it was harder for teenagers to rip Juuls. In 2018, it was estimated that over 3mm high schoolers were vaping, while in 2019, 27% of high schoolers and 10.5% of middle schoolers were ripping Juuls. After investigation from Congress, the Trump Administration, and the FDA, the walls came closing in on Juul. Things went south quickly in 2019, after Trump raised the legal age to purchase tobacco to 21 and the FDA banned flavored vaping products. Unfortunately for Altria, Juul was an easy target, even though hitting pens/vapes/whatever is now a common day occurrence. In June 2022, the FDA announced the plan to ban Juul from selling and distributing its products in the US, although the ruling hasn’t gone into effect just yet. As of September 2022, the $12.8B Altria stake is now a measly $450mm, or a total valuation of $1.6B. That valuation may going lower though, as last week Juul agreed to pay over $438mm to settle investigations from dozens of U.S. state attorney generals.

6) Teladoc buying Livongo for $18.5B.

What a horrible deal that encapsulated how insane valuations were a year ago and how people were comically wrong about the sustainability of pandemic related “trends”. In October 2020, Teladoc closed a deal to acquire fellow telemedicine and virtual healthcare firm Livongo Health for $18.5B – driving the combined company to a $37B valuation. Post close, Teladoc shareholders owned 58% of the PF company, with Livongo owning the remaining 42%. Teladoc expected $100mm in revenue synergies after two years, but $500mm in revenue synergies by 2025, with cost synergies of $60mm. The deal was meant to expand the PF company’s presence in the telehealth space, with Livongo known in the industry as a diabetes specialist. Given social distancing at the time, virtual healthcare companies saw quite the demand surge during 2020.

Shockingly (sarcasm), the staying power of remote interaction was overestimated and the demand for virtual healthcare services slowed down as the world returned to normal. Despite seeing an increase in visits, utilization among subscription plans remained relatively low. Naturally, there was also a leadership exodus at Livongo which hurt the ability to right the ship. 2Q22 results definitely demonstrated these pressures, with EBITDA (that is entirely driven by SBC lmao) sliding y/y and the 3Q22 guide to negative EBITDA isn't looking so sick either:

As of July 2022, Teladoc has recognized a $10B acquisition impairment charge. Today, the Company trades (ticker: TDOC) at a measly $5.5B valuation, relative to the initial $37B merger. It trades at a 89% discount to previous Feb. 2021 all-times! And yes, naturally, it’s a Cathie Wood favorite and currently her 5th largest holding!

7) Sprint acquiring Nextel Communications ($37.8B): 

In 2005, Sprint took a majority ownership stake in Nextel for $37.8B, turning the third and fifth largest U.S. telecom players into a much stronger third-largest player behind AT&T and Verizon. Things went south quickly with Sprint’s bureaucratic culture not meshing with Nextel’s entrepreneurial culture. For some reason, the combined company maintained two corporate HQs instead of merging into one office! Additionally, there was relatively limited overlap in technology, making integration relatively challenging. Sprint also had notoriously bad customer service, elevating churn going into an economic downturn. A key part of this deal going south though was that AT&T and Verizon benefitted more from the introduction of the iPhone, leaving Sprint’s crappy phones in the dust. This eventually drove Sprint to take a $30B goodwill impairment related to Nextel in 2008. Japanese telecom giant SoftBank stepped in in 2012 to buy a 70% stake for $20B and Sprint eventually merged with rival T-Mobile for a valuation of $37B in early 2020.

8) KKR and TPG taking TXU private for $44B:

Back in 2007, the leveraged buyout of Texas power generator TXU, later renamed Energy Future Holdings, was the largest LBO in US history. The Sponsors paid 8.5x EV/EBITDA and GS Capital, Lehman, Citigroup, and MS were all a part of the consortium. Even the OG, Warren Buffett dropped the ball here, as Berkshire bought $2B of bonds in conjunction with the buyout. The business was perceived as stable, with 3mm retail utility customers being served by the largest coal power plant in Texas, but this LBO quickly became doomed. The timing was obviously inopportune going into the GFC, but the Sponsor expectation re: natural gas pricing was totally wrong, especially as fracking gained steam, and natural gas kept nosediving. By 2013, Buffett had to sell the bonds he bought for $2B for pennies on the dollar - $259mm. While Berkshire recouped some interest payments, Berkshire still ultimately took a $873mm hit. The Sponsors took it on the chin too, as by 2014, TXU was bankrupt. Brutal.

9) Kmart and Sears ($11B):

In 2004, Kmart and Sears agreed to merge, creating the 3rd largest retailer in the United States. This merger came about as a way to stay competitive as Walmart, Target, Home Depot, Lowe’s, and Best Buy were gaining steam (and eventually took significant share) and as e-commerce was just starting to enter the fray. Regardless, the PF company was expecting to come out stronger and achieve $500mm in synergies after a year. What happened next is well sketched across the history books. The decline in brick and mortar moved quickly against Sears and the CEO, Eddie Lampert had spent over a decade not properly reinvesting in stores. By late 2018, the Company finally declared bankruptcy. By that point, Sears was a shell of itself – with 700 stores left standing (in 2022 it’s now 50...) after initially having 3,500 stores at the time of merger.

10) Citigroup merging with Travelers at a combined value of $140B: 

In 1998, Citigroup and Travelers merged for a combined value of $140B into a massive financial services and insurance company. Unfortunately, this deal was too big and complex to really work. There were supposed to be top line synergies from Travelers and Citi cross-selling to each other’s customers, but these benefits didn’t quite play out. Cultural issues also surfaced throughout the merger, with employee churn issues and outdated technology increasing costs. Costs were ultimately far too bloated for the two companies to work succinctly together. Citigroup moved Travelers into a subsidiary in 2022 which was eventually sold to MetLife in 2005 for $11.8B.

11) BofA and Countrywide ($4.1B, revised down to $2.5B):

In July 2008, Bank of America acquired Countrywide as a way to grow their mortgage lending business. People were starting to get nervous about housing, but at the time this seemed like a “value” deal. What makes the story more bizarre though was that before the deal even closed, several states were already suing Countrywide for mortgage abuses. This didn't stop BofA's due diligence though, and the deal got done. Once the housing bubble popped immediately after the acquisition, BofA was slammed with losses and lending practices penalties that ended up costing BofA roughly $50B!! While BofA is still left standing strong, it was quite a blemish in the early 2010s.

12) Quaker Oats buying Snapple for $1.7B in 1993:

Quaker outbid Coca-Cola and other parties for the Snapple brand, but wow they significantly overpaid. 27 months later, Quaker would go on to sell Snapple for only $300mm to Triarc Beverages. There were several miscues that caused the demise – 1) The inability to rationalize sales channels: Quaker sat down with hundreds of Snapple distributors to try to push Gatorade into prized spots on the shelf, but most distributors elected not to turn on the existing customers they had worked with for years, 2) Wrong product development: Quaker introduced 32 and 64-ounce Snapple bottles…but no one wanted to drink more than the existing 16-ounce bottle, and 3) Poor publicity: Quaker’s advertisements were inauthentic to the Snapple brand and Quaker terminated the founders after the merger, resulting in the founders going on the radio to call Snapple “Crapple”. Sales of $674mm in 1994 turned to $440mm in 1997, driving Quaker into selling Snapple in a firesale to Triarc. Not only did this deal cost the Chairman and President of Quaker their jobs, it sped up the eventual sale of Quaker to Pepsi. What makes it all the more painful, was that Triarc was able to sell Snapple to Cadbury Schweppes for $1B three years later.

Lastly, here's a couple of M&A deals that should’ve gotten done but didn’t!

Yahoo should’ve bought Google: Back in 1998, the Google founders offered to sell the Company to them for $1mm (love how the link I’m citing was written on Yahoo lmfao). Yahoo looked into buying Google again in 2002, but the Yahoo CEO at the time balked at Google’s $5B price tag. Now a days, Google trades at a modest 1.37T valuation.

Blockbuster should’ve bought Netflix: Back in 2000, Netflix offered to sell the Company to Blockbuster for a measly $50mm. Even worse for Blockbuster, the CEO at the time, John Antioco, was struggling not to laugh when the Netflix founders made the offer. It almost reminds you of those scenes in the Big Short where the Bankers are laughing at Mike Burry trying to buy Subprime MBS CDS.

By 2010, Blockbuster was bankrupt and Netflix was leading the streaming charge. Now a days, Netflix trades at a $103B valuation (although they used to trade closer to $300B)

That is all for this week!

Best,

HYH