Jerry Lewis once joked that, "people hate me because I am a multi-faceted, talented, wealthy and internationally famous genius."
The same might be said about many high-powered CEOs. Indeed, people hate inflated egos and there is a raging bull market in hubris in corner offices of public companies, where egos generally swell with the size of stipends and market caps.
But from an investment perspective, underestimating egos can be dangerous to your financial health. The bottom line is that king-sized egos are good for business these days, with the mergers and acquisition market setting a torrid pace and billion-dollar blockbuster deals cropping up almost on a daily basis.
It's the egotists that drive share prices into the stratosphere. Beyond reason, many would argue. Yet, a healthy ego requires exercise, no?
If you don't believe it, just ask the Falconbridge shareholders who have been the beneficiaries of what must rank as Canada's longest running and most intriguing M&A poker game in history.
As stockholders of Falconbridge (TSX:FAL) have learned, the M&A game doesn't just come down to the financial numbers and the synergies of the combinations. It's about the size of the ego. It's about foolish pride. It's about personality conflicts. It's about all-out war for screaming headlines. It's about gamesmanship and winning at all costs.
Some of the players in the fascinating Falconbridge fiasco seem to have been dealing in fantasy, so perhaps Berkshire Hathaway (NYSE:BRK.A) chairman Warren Buffett had it right when he likened over-zealous acquisitors to characters in a fairytale.
"Many managements apparently were overexposed in impressionable childhood years to the story in which the imprisoned handsome prince is released from a toad's body by a kiss from a beautiful princess," Buffett wrote in Berkshire's 1981 annual report. "Consequently, they are certain their managerial kiss will do wonders for profitability (of the companies they acquire). We've observed many kisses, but few miracles."
The relentless pursuit of Falconbridge stands as a classic example of how investors can ride corporate smooching to obscene profits.
When nickel giant Inco (TSX:N) announced a friendly takeover offer of $34 per share for mining rival Falconbridge last Oct. 11, it seemed like a decent time to cash in and move on. Investors are generally advised to cash in the takeover premium because it often becomes dead money.
However, in this case, if you'd sold your Falconbridge stock last Oct. 11, you'd have cashed in just as the train was leaving the station.
In this wild M&A environment, investors need to spend more time analysing the size of the egos of the potential acquisitors. Once Inco CEO Scott Hand made his move, it wasn't the end of the game as many believed. With too many ravenous acquisitors on the sidelines, it would only be the ceremonial first pitch of a tilt that is still being played out in extra innings.
The initial deal only whet the enormous appetites of the players, who were obsessed with increasing their clout in the mining world even if it didn't make a lot of sense from a pure business standpoint.
For Falconbridge stockholders, this monster power play in the base metals sector has translated into an astounding 87.4-per-cent premium. Last seen, shares in the nickel and copper miner headed by Derek Pannell were trading at $63.30, buoyed not only by soaring nickel prices but also rampant egotism.
Hand shouldn't have been surprised when his one-time sparring partner Don Lindsay laid his chips on the table, setting in motion a bizarre series of events involving five CEOs and five companies. The enterprising Lindsay is the CEO of cash-rich Teck Cominco (TSX:TCK.A), but it's well worth noting that he was formerly an investment banker with CIBC World Markets who once advised Falconbridge when it was competing with Hand's Inco for the Voisey's Bay nickel discovery.
In May, Lindsay rained on the Inco-Falconbridge parade with a stunning $17.8-billion hostile bid for Inco.
The next shot heard round the world came courtesy of M&A hotshot Mick Davis of Switzerland-based miner Xstrata (London Stock Exchange:XTA), who made a hostile $52.50 per share competing bid for the remaining shares of Falconbridge (Xstrata had acquired 20 per cent of Falconbridge a year ago).
At this point, the one ingredient that was missing from this wild poker game was an all-American ego. Well, Steve Whisler didn't disappoint. Whisler, CEO of U.S. copper giant Phelps Dodge (NYSE:PD), rocked the industry in June with a $40-billion offer to take out both Inco and Falconbridge in one fell swoop. It was a deal that had Hand and Pannell confidently high-fiving, but some of Phelps Dodge's major stockholders seeing red. Phelps Dodge shares took a merciless pounding on the news, as most analysts believed the price was too steep.
Big-time CEOs do not take kindly to losing, so no one could have been particularly surprised when notable wheeler-dealer Mick Davis countered Whisler's play by showing he wouldn't be beaten at his own game. Davis promptly upped the ante in Xstrata's bid for Falconbridge to $49 and then ultimately declared his company the victor with a $62.50 all-cash bid.
If Xstrata's latest bid was the final knockout blow, as many believed, a flustered Hand wasn't going to go down without a fight, telling Report On Business TV that Xstrata's offer was "a dog biscuit."
Dog biscuit? That comment smacked of sour grapes from a CEO who was losing control of a high-stakes poker game that was now in the voting hands of Falconbridge shareholders. And if you were a Falconbridge shareholder, sitting on a lofty takeover premium approaching 90 per cent, it was more like caviar and champagne.
Xstrata's all-cash bid paid off last Friday when Inco threw in the cards.
"Though a large number of Falconbridge shareholders supported our offer, unfortunately it wasn't enough," Hand admitted.
Davis gathered in his chips, and in a statement "welcomed the fact that Falconbridge shareholders have acted decisively in rejecting the Inco offer. We urge them now to tender to Xstrata's all-cash offer by Aug. 14."
Analysts say chances are slim that anybody else will join the game at this stage, leaving Xstrata with all the chips.
Meanwhile, the Phelps Dodge-Inco courtship is still very much on the table, with a competing offer from Teck and a shareholder vote standing in the way of any acquisition.
Gentlemen, start your egos.
* SAGE WORDS: "Egotism is the anesthetic that dulls the pain of stupidity."
- Frank Leahy, U.S. football coach (1908-1973).
(Gyle Konotopetz can be reached at gyle@businessedge.ca)
