Rodent Regatta

Remember DEC & Tandem?

They were engulfed by Compaq. How long will it take before we’re asking, ”Where is Compaq?” It is often very difficult for investors to separate themselves from emotional attachments to the companies that make up their portfolios. However, to believe that Compaq is somehow going to remain a shining star inside HP is rather naive. To think that Compaq’s absorption into HP is somehow transforming HP into a dramatically different company is equally naive.
Undoubtedly there could be benefits that accrue from the combination. However, no management team has ever justified a deal by stating that they simply ”wanted it.” A story from Warren Buffett’s 1992 letter to shareholders fits:

We have a firm policy about issuing shares of Berkshire,
doing so only when we receive as much value as we give.  Equal
value, however, has not been easy to obtain, since we have always
valued our shares highly.  So be it:  We wish to increase
Berkshire’s size only when doing that also increases the wealth
of its owners.

    Those two objectives do not necessarily go hand-in-hand as an
amusing but value-destroying experience in our past illustrates.
On that occasion, we had a significant investment in a bank
whose management was hell-bent on expansion.  (Aren’t they all?)
When our bank wooed a smaller bank, its owner demanded a stock
swap on a basis that valued the acquiree’s net worth and earning
power at over twice that of the acquirer’s.  Our management –
visibly in heat – quickly capitulated.  The owner of the acquiree
then insisted on one other condition:  ”You must promise me,” he
said in effect, ”that once our merger is done and I have become a
major shareholder, you’ll never again make a deal this dumb.”