M&A Strategy for Consolidations by Norman W. Hoffmann

Author:Norman W. Hoffmann
Language: eng
Format: epub
ISBN: 0071793437
Publisher: McGraw Hill LLC
Published: 2012-08-15T00:00:00+00:00

Skullduggery and Accounting Issues

Thrilled by skyrocketing stock values, the leaders of publicly traded rollups are compelled to accelerate the acquisition pace to maintain earnings velocity even when the deals fail to make economic sense. More problematic, however, is the fact that their compulsion may encourage the commission of fraud to maintain the appearance of the success necessary to support lofty stock prices; the history of rollups includes its fair share of such scandals.

The early poster child of rollups, Waste Management, found itself following that primrose path to scandal. In 1999, after nasty litigation, the company recorded a $3.5 billion charge to rectify false and misleading accounting statements for the years 1993–1996, and with its accounting firm, Arthur Andersen, it paid $229 million to settle accompanying shareholder lawsuits. Then, in November 2001, it paid another $457 million to settle class action lawsuits relating to its 1999 financial statements and security law violations in connection with its USA Waste Services merger in 1998.23

Shortly after the Waste Management scandal, the largest corporate scandal relating to rollups came to a boil.

In 1983, former milkman and basketball coach Bernard Ebbers met with two partners in a Hattiesburg, Mississippi, coffee shop, where they sketched on a napkin a business plan to become a long-distance telephone service reseller. Less than two years later, Ebbers became chief executive officer of the still tiny Long-Distance Discount Service, Inc., and he launched headlong into the rapid expansion of the business through the rollup and rollout strategy. With its acquisition of Advantage Companies in 1989, it became known as Worldcom, and it continued the serial rollup of similar companies, including Resurgens Communications Group, Media Communications, IDB Communications Group, Williams Telecommunications Group, MFS Communications Company, and UUNet Technologies. Ebbers’s efforts culminated in 1998 with a $40 billion merger with MCI Communications, the largest in history at that time; that was succeeded by a 2000 attempted merger with Sprint Communications that eventually was aborted because of antitrust considerations.

But all was not well. The slowing telecommunications industry led to declining stock prices, and Ebbers had used his WorldCom stock to collateralize huge loans to finance other business endeavors. The declining stock price led to margin calls, leading Ebbers to persuade his board to give him over $400 million in loans and guarantees, and then it came to light that Ebbers had participated in a massive fraud. Since at least 1999, earnings had been overstated by $11 billion by capitalizing telecommunication interconnection operating charges instead of expensing them and inflating revenues with bogus accounting entries from corporate reserve accounts. Those discoveries soon led to the bankruptcy of the company and a 25-year prison sentence for Ebbers.24

Although WorldCom’s lenders and common stock investors suffered dearly in that debacle, sometimes it is another corporate acquirer (and its shareholders) that pays the penalty. Started in 1994, The Learning Company was created through the consolidation of more than a dozen software companies serving the children’s electronic games and education market (including Softkey and Brøderbund), and with the dawning of the new millennium, Mattel hungrily gobbled it up to capture its prominent product lines.

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