11-1-17 BUSINESS BY CARLSON

Content provided by Paul Vaaler of the Carlson School

Belated Happy Halloween to ‘CCO listeners. I was handing out candy to young trick-or-treaters arriving at our Golden Valley door stoop as late as 9:30pm. That said, we still have a trove of mini-Snickers and Three Musketeers bars to snack on in November. Times are sweet!

As they apparently are for many Minnesota companies. The sweet taste of low-cost lending and high stock values are letting corporate managers here and across the country pursue some aggressive merger and acquisition strategies. It’s reminiscent of financial conditions in the late 1980s, late 1990s and mid-2000s.

Three cases in point from the news this week. Bayport, Minnesota-based Andeersen Windows announced its intent to acquire Quebec-based Fenetres MQ, a “luxury” home window maker. Here is where you can learn a little more about the logic behind the proposed acquisition: https://www.woodworkingnetwork.com/news/canadian-news/andersen-corp-acquires-fenetres-mq-quebec. Both companies are private (not publicly-owned and listed on an exchange) so we don’t know a lot about how either are doing. Andersen has about $2.5 billion in sales and 11,000 employees nationally: https://www.forbes.com/companies/andersen/. Fenetres MQ is almost certainly much smaller. Andersen’s pending acquisition is supposed to give it better access to Canada (for sure!), Europe and elsewhere overseas. So it’s a direct and indirect internationalization strategy, which is interesting in a context where NAFTA is being re-negotiated in the context of its possible termination by the US. My guess is that this deal is financed by cheap debt Andersen can raise.

The other example this week is Minneapolis-based Capella Education Corp, the for-profit university firm that announced its pending merger with Virginia-based Strayer Education, Inc. It’s described as a merger but it seems more like an acquisition where Capella is the target firm. These are public companies with share prices to watch, so we have as more deal details. We know that Capella will be acquired via a stock swap. Here is where you can learn more: https://www.insidehighered.com/news/2017/10/31/strayer-and-capella-announce-merger-amid-continuing-shake-profit-college-sector and http://www.startribune.com/capella-online-education-specialist-merging-with-business-school-operator-strayer/454094533/, Each Capella shareholder will get 0.875 Strayer shares. That values Capella at nearly $1 billion. Here, the deal appears to be driven by a slow-down in growth of student-customers and in the willingness of existing student-customers to buy their online course and degree offerings. This means that completion of the merger should see some pretty aggressive administrative cost-cutting at Capella. Mid-level managers there should be looking elsewhere for a job and soon. The market likes this deal. Typically, acquisitions like this see the target firm share price increase but he acquirer’s go down a bit. Here, share prices rose for both Capella and Strayer. The market apparently likes the complementarity of the two businesses –Capella in graduate and Strayer in undergraduate markets– and the prospect of aggressive administrative cost-cutting.

Austin, Minnesota-based Hormel Foods also announced its intent to acquire Columbus Manufacturing Inc., a premium deli meat and salami company, for $850 million, the largest acquisition in Hormel’s history. Columbus, based in California’s Bay Area, makes various types of salami, deli and Italian specialty meats and fashions itself as a “millennial-focused brand.” This is the latest in a string of deli and other high-end meat product acquisitions financed with a buoyant Hormel stock price. Hormel expects to close the deal in early 2018. The spam-makers stock price jumped from $30-31 on the news.

Lots of corporate activity driven by cheap capital often related to high share prices. Can it last. Yale economist and Noble Laureate Robert Shiller (of the Case-Shiller Housing Value Index) thinks maybe not. Another economic barometer he innovated is the CAPE, the Cyclically-adjusted price to earnings ratio. It’s computed as share price divided by the 10-year average earnings adjusted for inflation. He was interviewed recently when the Shiller CAPE exceeded 30. Right now it is about 31. The last time it crossed the 30 threshold was in the late 1990s, which led to then Fed Chairman Alan Greenspan’s warning that markets were exhibiting “irrational exuberance.” Oh, and the last time the Shiller CAPE hit 30 before that was in early 1929. And we all know what happened then. Take a look at the interview here: https://www.cnbc.com/2017/10/31/spooky-market-valuations-at-greenspan-irrational-exuberance-level.html. Markets are financing all sorts of “sweet” deals but they are also getting a little spooky. It looks like President Trump’s nominee to replace current Fed Chairwoman, Janet Yellen, will have to deal with this new age of financial froth. That would be Jerome (Jay) Powell. He’ll be the first Fed Chairman to lack an economics PhD –he’s got a law degree– since the mid-1970s when another lawyer named G. William Miller ran the Fed. Trick or treat!

Paul

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