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All the king’s bankers

6 August 2015 By Rob Cox

Some of the finest minds in finance seem to have missed the lesson of the classic nursery rhyme “Humpty Dumpty”: All the king’s horses and all the king’s men couldn’t put that anthropomorphic egg-like character together again.

They sure are trying. Activist Bill Ackman has taken a 5.5 percent stake in $75 billion snack-food giant Mondelez International predicated on the possibility, among others according to the Wall Street Journal, of putting it back together again with Kraft Foods, which just merged with H.J. Heinz. Meantime Re/code reported that one option for cloud computing software group VMware could be to absorb its data storage parent EMC.

Both ideas may exist solely in the pitch-books of investment bankers, but the zeal with which investors have glommed onto them suggests both credulity and excess in the mergers market. After all, shareholders cheered when EMC sold a slice of VMware to the public in 2007, and when the Kraft-Mondelez split was telegraphed four years ago this week.

Times change, but it’s hard to see why winding back the clock would add value in these cases. VMware’s shares have tripled since it was floated, giving it a $37 billion market value. That’s because investors like its profile as an unadulterated software play distinct from the wider-ranging and more mature $52 billion EMC, whose shares have risen by less than half since setting its subsidiary partially free.

It’s a bit easier to fathom mashing Mondelez back together with the new $23 billion Kraft Heinz, in part because the rationale for Kraft’s separation, completed in 2012, looked wonky in the first place. The split created a global snacks arm, Mondelez, and a North American grocery business, Kraft.

Yet shares in the supposedly higher-growth Mondelez are up just about 20 percent, lagging rivals like General Mills, PepsiCo and Nestlé, which boast better operating margins. Kraft didn’t manage to hone its operations as hoped, either, and ended up effectively selling itself. The problem wasn’t the structure as much as management.

If recreating the old Kraft could fix that, it just might make sense. Going full circle from EMC buying VMware to the other way around, though, seems like pure fantasy M&A. At least as far as merger volumes go, a Humpty-style great fall may not be far off.


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