The Mega-Merger Edition

Summary

Slate Money: The Mega-Merger Edition

Date: December 12, 2015
Host: Felix Salmon (with guests Jim Ledbetter, Jordan Weissmann, Kathy O’Neill)

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Overview

In this episode of Slate Money, Felix Salmon and his co-hosts deep dive into the world of corporate mega-mergers and acquisitions (M&A), focusing on three prominent deals from late 2015. The discussion is lively, discursive, and sometimes humorous, with the hosts offering accessible explanations of what drives these enormous business combinations and the sometimes surprising consequences. The main focus is on the Keurig/JAB deal, Yahoo’s valuation puzzle, and the Dow-DuPont merger.

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Key Discussion Points & Insights

I. The Keurig Green Mountain Acquisition by JAB Holdings

(Starts at 04:00)

• Deal Details: JAB Holdings, a private German conglomerate, acquired Keurig Green Mountain for $13.9 billion.
• The ‘Coffee Platform’ Play:
  • JAB has been strategically acquiring coffee brands worldwide (e.g., Peet’s, Stumptown, Intelligentsia, Caribou).
  • The aim is to build a global coffee platform to compete with Nestlé (Nespresso/Nescafé) in both developed and emerging markets.
• The Rise and Problems of Keurig:
  • K-cups revolutionized office coffee with convenience, but are criticized for poor quality and environmental waste.
  • Keurig attempted to block generic pods with their 2.0 machines (akin to digital rights management), causing backlash.
  • “They made these machines called Keurig 2.0 and the machines would refuse to allow generic K-cups... People got pissed off by this.” – Felix Salmon (09:48)
• Razor-and-Blades Business Model:
  • The focus is not on selling machines, but on the recurring profit from proprietary K-cups.
• Merger Valuation:
  • JAB paid a large premium for Keurig, which prompts questions about acquisition pricing and the need for premiums in public company takeovers.
  • “If you want to take over a public company, you generally need to pay a significant premium to the stock price... You're losing the optionality.” – Jim Ledbetter (12:34)
• Big Picture:
  • The consolidation aims to challenge global giants by owning every segment of the coffee market, from hipster cafes to mass-market convenience.
  • Environmental issues of K-cups highlighted as an afterthought.

Notable Quote:
“There is no such thing as too many hipster coffee shops. The hipster coffee shops are always and everywhere a good thing.”
— Jim Ledbetter (05:07)

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II. The Yahoo Sum-of-the-Parts Dilemma

(Starts at 14:37)

• Yahoo's Value Puzzle:
  • Yahoo owns major stakes in Alibaba and Yahoo Japan.
  • The value of these holdings often exceeds Yahoo’s market capitalization, sparking debate about unlocking shareholder value.
  • “If you add up the Alibaba stake and the Yahoo Japan stake... that number comes to more than the market capitalization of Yahoo.” – Felix Salmon (16:03)
• Attempts to ‘Unlock’ Value:
  • Yahoo considered spinning off its Alibaba stake to shareholders (as “Aabaco”), but the IRS refused to guarantee it wouldn’t be taxed.
  • Discussed the ironic proposal to instead spin off Yahoo’s core business and keep the investment holdings.
• Marissa Mayer’s Leadership:
  • Hired for star power and product turnaround, but Yahoo’s core business fizzled; share price buoyed by Alibaba’s success, not company performance.
• Longstanding Organizational Drift:
  • Described as “peanut butter spread thin” (referencing Yahoo executive Brad Garlinghouse’s famous internal memo).
  • The company struggles to define its central mission.
• Future Speculation:
  • The possibility that Yahoo could be sold or further split up.
  • Value trapped in conglomerate structure due to tax issues and investor uncertainty.

Notable Quotes:
“Yahoo... is more like a receptacle into which a bunch of things have been dumped.”
— Jordan Weissmann (18:20)

“You don’t solve a peanut butter problem by putting jelly on top of it.”
— Jordan Weissmann (24:24)

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III. The Dow Chemical and DuPont Mega-Merger

(Starts at 26:05)

• Deal Overview:
  • Proposed merger would create a $92B annual sales chemical giant, temporarily surpassing BASF as industry leader.
• Why Now?:
  • 2015 is a record-breaking year for M&A, driven by “cheap money”/liquidity and activist investors pushing for higher returns.
  • “The Fed has been dumping money out of helicopters for many years... And what happens when liquidity swirls around is that you get mega mergers.” – Jim Ledbetter (29:34)
• Merger Mechanics & Motivations:
  • Merging to split: Dow and DuPont plan to combine, then spin off into three separate, more focused businesses (agriculture, materials/plastics, specialty products).
  • This increases each spinoff’s focus and likely pricing power. It may also raise anti-trust concerns, but global competition (notably, state-owned firms in China and Saudi Arabia) weakens that risk.
• Competition and Globalization:
  • American chemical companies are competing with massive international, often state-owned, enterprises (e.g., Sinopec, Sabic).
  • Consolidation is a strategic response to global market pressures.
• Antitrust and Market Power:
  • Counterintuitively, combining big companies and then splitting them may increase monopoly power in their specific sectors.
  • “Each of those $40B companies is going to have more monopoly power than either of the $60B companies do right now.” – Felix Salmon (31:10)
• Price Fixing and Industry Behavior:
  • Industry has a history of anti-competitive conduct.
  • Referenced “The Informant” movie (about Archer Daniels Midland and price fixing).

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Notable Quotes & Memorable Moments

• On the Appeal of Hipster Coffee Shops (05:07)
  “There is no such thing as too many hipster coffee shops. The hipster coffee shops are always and everywhere a good thing.” — Jim Ledbetter

• On Keurig’s DRM Strategy (09:48)
  “They made these machines called Keurig 2.0 and the machines would refuse to allow generic K-cups... People got pissed off by this.” — Felix Salmon

• On M&A Premiums (12:34)
  “You generally need to pay a significant premium to the stock price... You're losing the optionality.” — Jim Ledbetter

• On Yahoo as a Company (18:20)
  “Yahoo... is more like a receptacle into which a bunch of things have been dumped.” — Jordan Weissmann

• On the Pervasiveness of M&A (29:34)
  “The Fed has been dumping money out of helicopters for many years... And what happens when liquidity swirls around is that you get mega mergers.” — Jim Ledbetter

• On Corporate Breakups (31:10)
  “Each of those $40B companies is going to have more monopoly power than either of the $60B companies do right now.” — Felix Salmon

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Timestamps for Key Segments

• [04:00] – Introduction of Keurig/JAB mega-deal, coffee industry vertical integration
• [09:08] – K-cup business model, DRM and backlash
• [12:34] – M&A pricing and rationale
• [14:37] – Yahoo’s value, the case of the hidden sum-of-the-parts
• [18:46] – The Aabaco/Alibaba spinoff controversy
• [24:00] – The ‘peanut butter’ management metaphor for Yahoo
• [26:05] – Dow-DuPont merger, industry background and trends
• [29:34] – Macro environment for mergers: cheap money, activist investors
• [31:10] – Increased monopoly power through breakup
• [32:05] – Global competition from state-run chemical giants
• [36:00] – Numbers round with newsy tidbits about FTC, Alibaba and Wu Tang

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Tone and Style

The episode is upbeat, clever, and conversational, with sophisticated explanations balanced by everyday analogies (coffee, peanut butter). The hosts aren’t afraid to poke fun at themselves or the world of high finance. They deliver sharp insights in plain language, making complex financial structures accessible and even entertaining. There’s a slight irreverence—characteristic of Slate’s house style—especially in their critique of business hype and silly industry jargon.

Transcript

[Felix Salmon]

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[Jordan Weissmann]

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[Felix Salmon]

Fiction podcast from Panoply and GE Podcast Theater.

[Jordan Weissmann]

All of season one is available now.

[Felix Salmon]

So listen and find out why a.

[Jordan Weissmann]

70 year old alien recording seems to be killing people.

[Felix Salmon]

Search for the message on itunes. I'm Gretchen Rubin. And I'm Elizabeth Craft, her sister and happiness guinea pig. Every week on our podcast we're we talk about a Try this at Home tip for making your life happier. Which Try this at Home tip do you think listeners have most responded to, without question, the one minute rule. Oh, the rule that anything that you can do in less than a minute, you do without delay. Yes. Put a dish in a dishwasher, hang up a coat, whatever. I have to say, this has improved my marriage because my husband is neat and I'm not. And this is a good example that happiness can feel very transcendent and abstract. But sometimes it's the little practical things that give us the biggest happiness boost. Search for happier wherever you find your podcast. The following podcast contains explicit language.

[Jim Ledbetter]

Hello and welcome to the Mega Merger edition of Slate Money, your guide to the business and finance news of the week. Or possibly the year. I don't know. I feel that this year has been a big year for something we don't talk about all that much, seeing as how this is a business and finance show, which is corporate finance, mergers and acquisitions. So we're gonna devote this entire episode to I promise it's not as boring as it sounds. At least it won't be because we have Kathy O', Neill, the data scientist and [e-mail] hello. Hello Kathy and you. Even more excitingly, we don't have the Slate resident millennial Jordan Wiseman who's staycating right now, and instead we have and.

[Felix Salmon]

Probably eating at McDonald's every morning and.

[Jim Ledbetter]

Probably having a McGriddle as we speak. We are Very blessed to be joined by the one and only Jim Ledbetter, who runs Inc. Magazine and also hosts an awesome panoply podcast called Inc. Uncensored.

[Jordan Weissmann]

And no truth to the rumor that we're merging with Slate Money, but is.

[Jim Ledbetter]

There truth to the rumor that you're in talks with Atlantic Media?

[Jordan Weissmann]

Our podcast is in play.

[Jim Ledbetter]

The podcast is in play. Everyone is in play. It's a big, like, media gossip day today. There's newspapers being bought in Nevada and in China, Kong and then. And also Quartz is apparently up for sale.

[Felix Salmon]

Really?

[Jim Ledbetter]

That's what the.

[Felix Salmon]

That goes perfectly with our theme.

[Jordan Weissmann]

I did not see that.

[Jim Ledbetter]

Yeah.

[Jordan Weissmann]

Who would buy Quartz?

[Jim Ledbetter]

Axel Springer.

[Jordan Weissmann]

Right.

[Jim Ledbetter]

Maybe. Or any number of people.

[Jordan Weissmann]

Is there a price tag associated with it?

[Jim Ledbetter]

No, there isn't, but they said the revenues are now 15 million. So if you take the standard new media multiple of what, six, seven times? It's like 100 million.

[Jordan Weissmann]

Yeah. Interesting.

[Jim Ledbetter]

What do you think, Kathy? Would you pay $100 million for Quartz?

[Felix Salmon]

It's hard to imagine having $100 million. Let me think about that.

[Jim Ledbetter]

If you had $100 million, would you spend it on a website? No, no, no.

[Jordan Weissmann]

That's pretty much.

[Felix Salmon]

Turns out. That's easy.

[Jim Ledbetter]

So if you had $13.9 billion, Kathy, what would you spend it on?

[Felix Salmon]

I would spend it on a coffee company called Keurig. And. And I would be a very rich German family. Topic 1 is the merger is the acquisition of Keurig Green Mountain by jab holding company.

[Jim Ledbetter]

For how much?

[Felix Salmon]

For $13.9 billion.

[Jim Ledbetter]

That's a lot of money. Okay, so this week I saw something which I've never seen before, and I thought, this is something we need to talk about on the podcast, which is the phrase coffee platform.

[Felix Salmon]

Oh, is that what the Keurig K Cup situation is called?

[Jim Ledbetter]

Well, it's. No. Well, it's. The acquirer is building out a global.

[Felix Salmon]

Oh, yes, they are. Listen. Listen to me. This is called the JAB Group holding company. It's basically just a very, very rich German family. I don't know anything about. Maybe you do, Felix. We could talk about the family, but they, in the last three years, have acquired a bunch of coffee companies. So they've acquired some of them. I don't know. Masters Blenders, De Masters Blenders, Jacobs Dauer, Egbert's Caribou Coffee Company, Peter Pete's Coffee and Tea. We might have heard of Stump Down Coffee Roasters and Intelligentsia Coffee, which I've never heard of.

[Jordan Weissmann]

Oh, no.

[Jim Ledbetter]

Oh, intelligent. You haven't heard of Intelligencia Intelligentsia is like, if you're so. I am of the opinion, and I can't repeat this often enough, and I completely agree with Tyler Cowan on this one, who I think I stole it from, that there is no such thing as too many hipster coffee shops. The hipster coffee shops are always and everywhere a good thing.

[Felix Salmon]

And.

[Jim Ledbetter]

And intelligentsia is a hipster coffee shop. Just like Blue Bottle, just like Stumptown, just like all of the other ones. And they make good coffee, just like La Colombe. And the more we have of those, the better.

[Felix Salmon]

I kind of agree. I mean, just on, like, 14th and 15th, between. On 6th Avenue, between 14th and 15th, there's like fika and Think Coffee. And we need both of them because the line at FIKA sometimes gets kind of long.

[Jordan Weissmann]

But by contrast, there can be too many Starbucks and Dunkin Donuts. Is that a correct corollary?

[Jim Ledbetter]

And there's been an ongoing Slate Money debate about Starbucks, which is a kind of sub debate of the McDonald's debate.

[Jordan Weissmann]

Right.

[Jim Ledbetter]

And my theory about Starbucks is that it was helpful in bringing up the minimum quality of American. Quality of American coffee.

[Jordan Weissmann]

British too, by the way.

[Jim Ledbetter]

Starbucks is bad coffee. But at least it made people realize just how bad, even worse coffee was.

[Jordan Weissmann]

That's right.

[Felix Salmon]

Okay, so let's talk about bad coffee. Because the thing about this, this coffee platform that JAB is setting up, and we'll talk about Keurig too, because it's an interesting company in itself, but they're trying to compete with Nestle, which is like.

[Jim Ledbetter]

Which is. Nespresso.

[Felix Salmon]

Yeah, Nespresso. And it's huge.

[Jordan Weissmann]

Nescafe.

[Felix Salmon]

Yeah, yeah. And. And also a lot of instant coffee.

[Jim Ledbetter]

Nescafe is. Is really bad coffee. Like when I was growing up in England.

[Jordan Weissmann]

That's what I'm saying.

[Jim Ledbetter]

Coffee was instant.

[Jordan Weissmann]

Still in parts of England, if you order a coffee, you will. The default will be instant coffee because why aren't you ordering tea? Because you haven't ordered tea.

[Jim Ledbetter]

We're giving you this crap. One of the things that I grew up with was television ads for instant coffee. It was one of the most advertised things on the telly was ads for instant coffee. And the ads for instant coffee were always this. Tastes just as good as if you'd brewed it.

[Felix Salmon]

So the funny thing about it is.

[Jordan Weissmann]

Felix never has a second cup at home.

[Felix Salmon]

Let's stick with instant coffee for a second. The play that I think that they're trying to make here with buying up all these coffee companies is just to have this huge coffee network but the growth in coffee isn't so much in this country or in Europe even, it's in the emerging markets. So like for example, I went to Ghana a few years ago and not many people drank coffee, but people were starting to drink coffee and the only available coffee was instant coffee. So I think that is where they're really trying and believe it. I mean it's like Western Africa. They don't drink coffee in Eastern Africa. They make coffee, but it's this weird thing.

[Jim Ledbetter]

So I want to ask you about this acquisition of Keurig Green Mountain, which makes those horrible sort of coffee capsule machines, pods in which you find only in like bad offices because the one in their hotels. And I just thought that the world had moved on because people realized how bad that coffee is and they've either started making good coffee or at least bought an espresso machine or something.

[Jordan Weissmann]

It's not the method, is it? It's the quality of the coffee in the pot. Presumably if you had decent coffee in the pot, it could make you a decent cup of coffee.

[Felix Salmon]

Guys, guys, I want to remind you of something and I feel like Jordan over here talking about McDonald's. But do you remember how bad the coffeeing offices was before K cups? Yeah, it was like a pot of coffee made God knows when and it was like six hours later and you finally found it.

[Jordan Weissmann]

Oh wait, are you Talking about slate, Mr. Coffee? It's burning at the bottom.

[Felix Salmon]

It's burnt.

[Jordan Weissmann]

It's kind of burnt.

[Felix Salmon]

It's thick. It's like a spoon wouldn't be able to stir it. The K cups were actually kind of a big deal and it was a good step forward. And the great thing about K cups and I'll say all the positive things before I demolish it, cause I hate K cups. The good thing about it is that any individual would be able to use it and they wouldn't have to clean up anything.

[Jordan Weissmann]

Right.

[Felix Salmon]

The main thing is real coffee requires maintenance and nobody in a coffee.

[Jim Ledbetter]

And there's a whole thing of coffee grounds which you need to deal with and no one likes to deal with coffee. And this is where capsule, capsules are a very, very fast growing part of the coffee world. And K cups are the biggest capsule platform in America.

[Jordan Weissmann]

There's that word again.

[Jim Ledbetter]

And Nespresso pods, which are vastly superior, are the biggest capsule platform in the world. And so now there's this huge fight between Jab and its platform and Nestle and its platform as to who's going to win the.

[Jordan Weissmann]

This is like the AOL Yahoo Instant messaging battle of the early aughts.

[Felix Salmon]

So one of the things that they did that pissed people off and I think one of the reasons that Keurig was actually going down, its stock was going down until it just bought, which brought it way back up, was that they made these machines called Keurig 2.0 machines and the machines would refuse to allow generic K cups to be inserted. They had this little test to make sure it was a Courage certified cup.

[Jordan Weissmann]

And all these generic digital rights management for coffee.

[Felix Salmon]

Exactly what it was. It's just like the Kindle. You couldn't export your Kindle books to other readers. You couldn't use generic cups and K cups. People got pissed off by this and they actually reintroduced the old version where you're allowed to use generic cups. But this was a big problem. And sales went way down for the machines, but the sales went way up for the cups. So in some sense they like, they did it in a smart way. They're just like, we know people once they have these machines, have to buy the cups that go along with them. It's awful.

[Jim Ledbetter]

And yes, the razors and the razor blade strategy. But it seemed, you know, it's a strategy which works until it doesn't.

[Jordan Weissmann]

Razor, razor blade, give the, Give the razor away for free and sell you the blades. Oh, it's.

[Felix Salmon]

Is that true for like men's razors?

[Jordan Weissmann]

It was now. No. Now they charge you a lot for the razor, but in the old days.

[Jim Ledbetter]

But they still make the real money on the blades. No one actually makes money selling razors.

[Felix Salmon]

It does seem crazy how expensive razors.

[Jordan Weissmann]

It's a separate conversation.

[Jim Ledbetter]

Well, yeah, a certain Slate Money sponsor who's not sponsoring us this week. So we're not going to talk about trying to disrupt that business. So. Yeah. So the question which I have for you, Kathy, is $13.9 billion. That's a lot of money.

[Felix Salmon]

Yeah, it's, you know, they bought it at basically $92 a share, which was almost twice what they were selling. The shares were selling at a week ago. So the question is why did Jab holdings buy pay too much for it or pay so much for it?

[Jim Ledbetter]

Yes. And what's the answer?

[Felix Salmon]

I don't really have a theory about that, Jim.

[Jordan Weissmann]

So let's guess and or stipulate that consumers don't care. Right. The brands matter. Arguably. There are Pete's fans, there are Stumptown fans, but they don't really care who signs the checks. We agree that that's almost certainly the case. Then I can only assume it's efficiencies from economies of scale. Right. That somehow the distribution networks can be streamlined.

[Felix Salmon]

I'm sure that it's. I'm sure that there's an argument that it's worth it to them that much to pay that much. But why didn't they just get to pay less than that? Like, why did Couric hold out for that price? I don't understand why they didn't get a little bit less.

[Jim Ledbetter]

Well, I think the way that M and A works is if you want to take over a public company, you generally need to pay a significant premium to the stock price. That's quite a premium. You can't just, like, go in and pay 10% more and board of directors. Oh, okay.

[Felix Salmon]

Why is that?

[Jim Ledbetter]

Because you're losing the optionality. Right. If you're traded on the stock market, there's a huge option value to holding the stock and possibly seeing it go up. So you lose all of that option value by selling. You're just collapsing.

[Felix Salmon]

If you are a director.

[Jim Ledbetter]

If you're a director, yeah.

[Felix Salmon]

So they hold out.

[Jim Ledbetter]

So, yeah, most takeovers of public companies, you know, it's very common to see 50, 75% premiums to, you know, where the stock price was. Especially in the case of a company like Keurig, where the stock price was actually in the hundreds not that long ago. So it's like, it's not unthinkable. In the relatively recent past, it was worth this much. And so why should we care too much about what it was worth yesterday?

[Felix Salmon]

So are we thinking, like, their owners, they have lots of stocks in this company whose value is quite variable, and when they get bought, they. They lose that variability. It's just a stuck number at that point.

[Jim Ledbetter]

Exactly.

[Felix Salmon]

Interesting.

[Jim Ledbetter]

And variability, somehow.

[Jordan Weissmann]

Somehow it gets made up for by the very large check that ends up in their pocket.

[Jim Ledbetter]

That's it for coffee. I need to thank Braintree for sponsoring us this week, because they're awesome. It's a beautiful thing when your customers want to pay you. But what if they could pay in a million different ways? Well, maybe not a million, but Braintree lets you accept every conceivable form of payment, including Apple Pay, PayPal, Android Pay, Bitcoin, Venmo, you name it. You can take them all in. Get this. 130 different currencies. You're not even constrained to the dollar anymore. As your company grows, Braintree will be there as the conduit for all of the money that's coming in. It's a great little thing. It just takes A couple of lines of code to get started. To learn more, visit braintreepayments.com money. All right, so topic two is Yahoo. Yahoo.

[Felix Salmon]

Oh, my God.

[Jim Ledbetter]

So this is one, this is a fascinating story to me because I feel that people love to talk about Yahoo because it's this massive company we all know, and almost everyone in America visits some kind of Yahoo site at some point over the course of the month. And I did.

[Felix Salmon]

Really, if we stop right there, like.

[Jordan Weissmann]

What you look at Yahoo. Finance. Yahoo Finance is actually probably every day.

[Felix Salmon]

Okay. Besides, people in finance who all look at Yahoo Finance, Yahoo.

[Jim Ledbetter]

Sports is enormous.

[Jordan Weissmann]

That's true.

[Jim Ledbetter]

Yahoo Mail is huge. And there's just other whole swathes of bits and pieces. Yahoo homepage still gets 200 million visitors a day or something. It's. It's absolutely enormous. And so people think about it as a Internet business which has traffic, which sells ads, which has apps, which buys, you know, smaller Internet businesses like Tumblr or, you know, little apps and Flickr. Yeah, Delicious.

[Jordan Weissmann]

Didn't they buy Delicious?

[Jim Ledbetter]

They did buy Delicious. Do you remember Delicious?

[Felix Salmon]

What is that?

[Jordan Weissmann]

Delicious was the, was the post tagging, the tagging, post search site. It was just way too complicated. But there was this idea that we would find things on the Internet through kind of consensual tagging rather than search per se. And it might have worked, but no one really knew how to use it.

[Jim Ledbetter]

And also no one knew where to put the dots. Yeah, it was like D, E, L, I C I, O, U us.

[Felix Salmon]

So you could say, oh, my friend was here. And they liked this.

[Jordan Weissmann]

Something like, everyone agrees that this is the best entry about Chelsea or whatever. And that's, that's how we would come to find content on the Internet.

[Jim Ledbetter]

There was, there was a lot of talk in the late 90s about ontology.

[Felix Salmon]

Yeah.

[Jim Ledbetter]

And all that kind of went away with, with search. But there was a time when everyone was really trying to solve the ontology problem on the Internet and that was part of it. But anyway, the fact is that for all that Yahoo does various bits and pieces of things on the Internet at quite astonishing scale. If you look at the company called Yahoo, it's worth gazillions of dollars. So it's worth about $30 billion or $35 billion. And what people love to do is they love to do these things called sum of the parts valuations. So Jim and I used to work at Reuters next to the people at Breaking Views. And as far as I can make out, that's all that Breaking Views ever does is These like. So they look at a company and say, well, this bit is worth this much and this bit is worth that much. And so the whole company is undervalued or overvalued. And Yahoo is the classic company you can do this with because. Because it owns a very large stake in Alibaba. And Alibaba is a listed company, which you know how much that stake is worth to, like, the penny. It also owns a very large stake in Yahoo Japan. And Yahoo Japan is also a listed company. You know how much that stake is worth. And if you add up the Alibaba stake and the Yahoo Japan stake, and then that number comes to more than the market capitalization of Yahoo. And so people are saying, therefore buy. So people are saying, well, how do we unlock this value? And Yahoo had an idea.

[Felix Salmon]

Can I go back for one second? I'm just. I'm kind of all over the place today. But you know how we just talked about how JAB holdings overpaid in a certain way? They paid more. Doesn't that kind of fly in the face of this breakdown by value?

[Jordan Weissmann]

Yes and no.

[Felix Salmon]

Because we were saying it's like you buy a bunch of things in your basket. The beauty of you paid too much.

[Jordan Weissmann]

The beauty of the. The free market. One of the beauties of the free market is there is no fixed right way to organize a company, to structure a company.

[Jim Ledbetter]

Right.

[Jordan Weissmann]

I mean, we've gone through over the decades trends in conglomerates, trends toward breaking up conglomerates. I mean, Felix, you say Yahoo is a good example of this, actually. I mean, Yahoo is like an extreme example of this. In fact, Yahoo doesn't even really make sense anymore as a unified company. It is more like a receptacle into which a bunch of things have been dumped. And so, yeah, the plan was to sell the Alibaba stake.

[Jim Ledbetter]

So the plan was to spin off the Alibaba stake and give it to shareholders as a separate company called abco.

[Jordan Weissmann]

And for Alibaba Company, this is the creative things that.

[Felix Salmon]

To sell it to Americans, though.

[Jim Ledbetter]

No, no. So whoever owns Yahoo's shares would then would henceforth have Yahoo's fraction of abconship. But also, you'd have, like, for every Yahoo share, you would also have an ABCO share.

[Felix Salmon]

Okay?

[Jim Ledbetter]

And then the ABCO share is basically just a holding company which does nothing but hold a bunch of Alibaba stock and, you know, and wait for the fateful day that Alibaba finally gets around to buying it. But yeah. So the IRS refused to say that this would not be a taxable transaction. If it is a taxable transaction, it's not worth doing since. At all. Because shareholders wind up having to pay a massive tax bill on this spin off. And so now they've now started pondering, and this is my favorite thing of all, they've started pondering, well, what if we do it the other way around and instead of spinning off the Alibaba shares to Yahoo shareholders, what happens if we spin off Yahoo. Yahoo. To Yahoo shareholders, which is the most wonderful.

[Jordan Weissmann]

Yes.

[Felix Salmon]

First of all, how would that work? And second of all, why would the IRS be okay with that?

[Jordan Weissmann]

It's not a repatriation of foreign funds. Right. That's the difference. I mean, I'm sure there would be tax consequences, but I don't think it would be.

[Jim Ledbetter]

So that's actually an incredibly good question, Kathy. Basically, the Yahoo board is flailing. They brought in this extremely glamorous and expensive CEO who just had twins. Who just had twins. Congratulations, Marissa. And the. And she basically did nothing to the core business. It's managed to go absolutely nowhere since she came in. She's had massive executive turnover and the core business has basically gone nowhere. But the share price has gone up because Alibaba went public and they hired Katie Couric.

[Jordan Weissmann]

Can't say she did nothing.

[Jim Ledbetter]

And they hired Martha Nelson as a salary of $5 million a year.

[Jordan Weissmann]

And Andy Serwer for that matter.

[Jim Ledbetter]

But do you think he's getting paid $5 million?

[Jordan Weissmann]

No, I do not.

[Felix Salmon]

So actually my theory about this like valuation thing is if, if, if Yahoo is. It totally makes sense from my perspective. If Yahoo is like a shareholder in Alibaba and otherwise just loses money, like hell, then it makes sense that it's overall worth less than.

[Jim Ledbetter]

I don't think it loses money. Yeah, but it's just, it's just not valued at a positive.

[Felix Salmon]

Like if, but if it does lose money, I'm just.

[Jim Ledbetter]

Okay, so this is the idea that the board is now entertaining the idea that they could sell the. What's known as the Internet business of Yahoo, which is basically everything that you've heard of. And if you put it up to the highest bidder, then there are people who would bid billions of dollars for it. How many billions? We don't know. It might be one, it might be two, it might be five. But Yahoo as a business is actually worth something. It only looks worthless if you consider the Alibaba stake and the Yahoo Japan stake, if you value them fully. But there's no particular reason why you should value them fully because you can't really extract them from the company without paying taxes.

[Felix Salmon]

Okay, maybe. Maybe that's just the difference. Right. Okay, well, I don't know how this all works. It seems pretty approximate to me, actually. The breaking up of the valuation of companies.

[Jim Ledbetter]

Well, yeah, I mean, the valuation of. Well, the valuation of companies is not approximate at all. It's exactly the share price multiplied by the number of shares. And that's a very exact number which changes second to second. But how investors determine what's a sensible price on a short term level, it's pretty random. It's just a random walk. And on the long term, share prices fluctuate and there's a bunch of assumptions built into them which you can argue with.

[Jordan Weissmann]

I think one of the big problems with Yahoo as a company, and it was something that Marissa was supposed to figure out and didn't figure out, they haven't really made the transition to mobile. A very large share of that massive audience that you talk about for their properties is desktop. And of course desktop is still very valuable, but all the motion from other companies is toward mobile. And then, yeah, even within the Internet business itself, there are all these kind of parts lying around that nobody knows what to do with. Like Google. They're often in the position of buying companies and then just kind of letting them die. I have a great name for you, a great trivia name from approximately 10 years ago. Brad Garlinghouse. Do you remember the Peanut butter manifesto of 2006? Brad Garlinghouse was like a VP of something at Yahoo and he wrote this thing called the Peanut Butter Manifesto coming back to me, in which he talked about the company as being like peanut butter, like spreading it really thin to the outskirts of the piece of bread. And that you're not going to grow this company by spreading it a little further. It's like we gotta figure out what it is that we do that's at the core of the sandwich and concentrate it on that rather than trying to keep pushing out the. And they still. This is 10 years ago and they still haven't figured it out. That I think is great to have.

[Felix Salmon]

Jim on the show. I really like him.

[Jim Ledbetter]

Ah, next. Next week on Slate Money, hosted by Jim Ledbetter. I feel like. I feel like Jim is just gonna, you know, take a ramble.

[Felix Salmon]

It's a beautiful metaphor.

[Jordan Weissmann]

It is a beautiful metaphor.

[Jim Ledbetter]

It is a beautiful metaphor.

[Jordan Weissmann]

Enduring, enduring. And then I remember when there was the talk of merging Yahoo with Microsoft, I wrote a blog post saying, you don't solve a peanut butter problem by putting jelly on top of it.

[Jim Ledbetter]

But you do. I love peanut butter and jelly. I do too, but okay, enough. Yahoo. Slate money is also sponsored by ZipRecruiter. I feel that Marissa Mayer should be using ZipRecruiter to hire senior executives because she can't possibly do worse than she's been doing up until now. And ZipRecruiter has a gazillion candidates. Well, again, that's maybe a small exaggerated. IT has over 6 million resumes on file. If you post a job ad using ZipRecruiter, as more than 400,000 businesses have done, they will find you the perfect candidate almost immediately, certainly within 24 hours. It's so much easier than trying to go to a million different job sites and post it all over the place. It's a one stop, simple solution and it has a 100% satisfaction guarantee. They will fix everything if you don't love it. So try ZipRecruiter for free today by going to ZipRecruiter.com SlateMoney that's ZipRecruiter.comSlateMoney to try ZipRecruiter for free. SipRecruiter.com Slatemoney Jim Ledbetter for the third and final merger of the week.

[Jordan Weissmann]

Yes.

[Jim Ledbetter]

That we're going to talk about. Oh, yeah. So I've decided we're not going to talk about Staples and Office Depot because they're not merging. Right.

[Jordan Weissmann]

Because there are antitrust concerns, actually.

[Jim Ledbetter]

And so like, but if Staples and Office Depot aren't allowed to merge, how on earth could this one happened?

[Jordan Weissmann]

Yeah. So this one is of course, Dow Chemical and DuPont, two of the largest chemical companies in the world. And the merger of them, which would create a company of approximately $92 billion in annual sales, would in fact be the largest chemical company in the world, taking over the current market leader, which is basf, a German chemical concern.

[Felix Salmon]

And where's Monsanto in that list?

[Jordan Weissmann]

You know, Monsanto? It seems to me that, because I looked at that this morning, the same question in mind. Monsanto, I think, is categorized differently as an agriculture company. Most of the world's largest chemical companies are very closely related to oil companies, whereas Monsanto is, strictly speaking an agricultural chemical conglomerate. I think that's the answer.

[Felix Salmon]

I see. But it's also huge, right?

[Jordan Weissmann]

It's very large. And there are agricultural divisions of both DuPont and Dow Chemical seems to be part of what is at the heart of this merger. So a few things about this one is that even though it's creating a company with $92 billion in annual sales. This is not the largest merger of 2015. It's not even in the top three because it's. This is or will end up being the largest year for mergers and acquisitions in American history.

[Jim Ledbetter]

So what are the top three?

[Jordan Weissmann]

The top three are. Give me one moment.

[Felix Salmon]

I just want to say for the record that Jim came prepared.

[Jordan Weissmann]

Prepared w the top three. One of them was Dell adp. One of them is Pfizer Allergan and of course Anheuser Busch InBev. S A B Miller was in 2015.

[Jim Ledbetter]

Yeah, but not. Wait, wait, SAB Miller and Pfizer Allegan and Dowdy.

[Jordan Weissmann]

The one thing which is Dell Emc. I'm sorry, I got the name of that.

[Jim Ledbetter]

The one thing which all of these deals have in common is that none of them have actually closed.

[Jordan Weissmann]

That's right.

[Jim Ledbetter]

They're all going up in front of antitrust regulators and the regulators can all say no.

[Felix Salmon]

So these are announcements of intended merger.

[Jordan Weissmann]

Typically, though, I mean, there are of course, exceptions, but usually what happens is they'll have to sell off this or that. I doubt these mergers will be rejected altogether. Could happen.

[Jim Ledbetter]

Although Pfizer, Allegan, that's like, you know, every single politician in America is railing against that one.

[Jordan Weissmann]

And that always works because of the inversions.

[Jim Ledbetter]

Because it's an inversion. Exactly. Because the idea is that Pfizer, which is a big company, is getting bought by Allegan, which is a smaller company which just by coincidence happens to be headquartered in Ireland.

[Felix Salmon]

Something like that happening with DuPont and Dow.

[Jordan Weissmann]

We are looking at 4.3, $4.5 trillion worth of mergers, adjusted for inflation. 2007 probably edges it out. But at any rate, 2015 comes very, very being the biggest merger and acquisition year over year.

[Jim Ledbetter]

Why is that, Jim?

[Jordan Weissmann]

Yeah, so that's a good question. Part of it clearly has to do with the durable availability of cheap money.

[Jim Ledbetter]

But we've had cheap money for many years.

[Jordan Weissmann]

Here's the chart. It's going up.

[Jim Ledbetter]

Here's the chart.

[Jordan Weissmann]

It's going up.

[Jim Ledbetter]

Jim is pointing at a chart.

[Felix Salmon]

Imagine a chart that goes up.

[Jordan Weissmann]

Yes. Imagine a kind of hockey stick growth from left to right, the trough of which, of course, is the.

[Jim Ledbetter]

I have a kind of theory about this, which is the Fed has been dumping money out of helicopters for many years. Now, the first effect of that is for stock prices to go up and for bond prices to go up. And once the stock prices and the bond prices have gone up about as far as you think they can possibly go, then the effect of all of this liquidity, it Just starts swirling around. And what happens when liquidity swirls around is that you get mega mergers and army purchases. And really what happens in a mega merger is not that anything changes. Most of the time it's change of ownership. It's just different people and owning different combinations of stuff.

[Felix Salmon]

In this case, it's actually their competitors.

[Jordan Weissmann]

They are competitors. And here's the thing, both of these companies within the last few months have been the target of well known activist investors. In the case of dupont, Nelson Peltz. In the case of Dow Chemical, Daniel Loeb. And in both cases, what the activist investors were trying to do, which is what activist investors usually do, back to your point about valuations, is get enough of the company to own it, to split it up, to spin off the value. And that's actually what's going to happen. So they're going to come together to be very large and then split off into three parts.

[Jim Ledbetter]

So this is the thing I really love about this deal, and this is one of the reasons I really wanted to talk about it, is because normally when you get two $60 billion companies merging to become $120 billion company, everyone goes, ooh, wow, that's huge, Huge.

[Jordan Weissmann]

Now let's make it smaller.

[Jim Ledbetter]

In this case you have two $60 billion companies merging to become three $40 billion companies, which is kind of imagine the growth possibilities. But the crazy thing is that each of those $40 billion companies is going to have more monopoly power than either of the $60 billion companies do right now. Because basically both of the $60 billion companies have three main business lines. It's agriculture. What are they, Jim?

[Jordan Weissmann]

Agriculture products, materials like plastics and so called specialty products. Those will be the three divisions.

[Jim Ledbetter]

And so they're both competing with each other on three fronts. And then what you do is you merge the two together, you split it up into three companies and then those three companies don't compete with each other at all.

[Felix Salmon]

So in three different industries they're being anti competitive.

[Jim Ledbetter]

Yes.

[Jordan Weissmann]

And look, you know, that is quite a feat. Price fixing and other anti competitive behavior is rife within this industry and has been for decades. They made a movie about it, if you remember the Informant with Matt Damon, based on the. I mean that one was Archer Daniels Midland, closer to the Monsanto kind of agriculture things. But the price fixing allegations had been made by this guy that is played by Matt Damon named Mark Whitaker, if memory serves. We sort of take it as a given that there's a lot of kind of nodding and winking going on in this sector. But here's the other interesting thing. When you play on this level, when you are selling chemicals by the tens of billions of dollars a year, your chief competition is actually state run enterprises outside of the United States. I suspect most Americans do not know these companies. But after BASF and Dow Chemical, the third largest chemical producer is Sinopec, part of the Chinese government. And then the next one after that is, I think it's Sabic, it's Saudi Arabia's chemical company. Now presumably state owned enterprises do not go through this exercise of merging in order to spin off. And yet that's what our companies need to do to compete with state run enterprises. I find it very strange, but. But I was sort of struck by.

[Jim Ledbetter]

Yeah, and state run enterprises are fascinating and some of them are, you know, highly efficient and some of them are highly inefficient and some of them can change. Like for instance, Pita Vesa, which is the Venezuelan oil company, used to be not that long ago, maybe 10 years ago, certainly 15 years ago, one of the most efficient and advanced oil companies in the world. It was an incredibly professionally run office.

[Jordan Weissmann]

Chavez took care of that.

[Jim Ledbetter]

Yeah, and then Hugo Chavez comes in and basically fires everyone who's in charge of it and replaces them with a bunch of like army buddies of his. And now Pervasa is a, I believe the technical term is a shit show.

[Felix Salmon]

So I mean, it brings up the question, like, how international are these companies?

[Jordan Weissmann]

Very.

[Felix Salmon]

Yeah, yeah. I mean, so they really are competing with Saudi Arabia and China.

[Jordan Weissmann]

Yeah, and Germany, which is, which is why I suspect the antitrust concerns, while of course they should be investigated, will probably not put a stop to this merger because there is a relatively robust global marketplace. The demand for these chemicals is clearly global.

[Felix Salmon]

How much lobbying money do these companies spend?

[Jordan Weissmann]

I don't know off the top of my head, but I'm sure it's in the millions of dollars because they're highly regulated industries.

[Felix Salmon]

Yeah, scary.

[Jim Ledbetter]

Okay, so we are going to move on to the numbers round. But first, Slate Money is also brought to you by the Message, which is an original science fiction podcast which Panoply has put together with GE Podcast Theatre.

[Felix Salmon]

Hi, Nikki Tomalin here and I'm the host of the Message. I'm going to take you into an elite cryptography think tank and check it out. Their top project right now is to decode a highly classified radio transmission from the 1940s.

[Jordan Weissmann]

Have you listened to it yet?

[Felix Salmon]

Not yet. We're having a discussion about that. But if I offered you the chance to listen to it, Right now. Sounds like a no.

[Jordan Weissmann]

Well, we don't really know what it is. Voices, music, breathing.

[Jim Ledbetter]

But, you know, I'm not going to.

[Jordan Weissmann]

Mess with that thing.

[Felix Salmon]

To sum it up, extraterrestrials. Subscribe to the message on itunes.

[Jim Ledbetter]

Numbers.

[Jordan Weissmann]

I have an awesome.

[Jim Ledbetter]

So. So. So Jim has told us like he's really twice now that he's oversold anything.

[Jordan Weissmann]

Yeah, you're probably right. I have oversold it. But I'm so excited by this number. It's not the number per se. I just think this topic is one of those ones that makes me thwack my head. The number is $1.3 million. That is the number this week that a fine that was levied by the Federal Trade Commission against Nordstrom, Bed, bath and beyond, J.C. penney and an online retailer called backcountry.com $1.3 million divvied up among the four because the FTC accuses them of passing off rayon as bamboo in a variety of products, some of which are bed linens for babies and sort of all this stuff. And this is the reason the FTC is so pissed, is that they had deliberately warned retailers in 2010 not to do this. But apparently people are so bamboozled by the idea, by the idea of bamboo that they can't help it. The funny thing being, you know, rayon sounds very kind of like space age artificial. Chemically. It really is a kind of reconstituted cellulose. You can do things to bamboo that make it essentially rayon and kind of almost vice versa. There's very little difference. And obviously consumers like what they're buying. They think it's bamboo, they're happy with it. They're not taking it back, saying, you know, get rid of this rayon out of my house. So the problem here is that people seem to be too in love with the idea of products made bamboo.

[Jim Ledbetter]

Well, the problem here is that people don't understand there's this distinction between natural and artificial, between chemicals on the one hand and natural things on the other hand. People like bamboo because it grows out of the ground and it's natural and it goes quickly and pandas eat it.

[Felix Salmon]

There's good things about bamboo, actually.

[Jim Ledbetter]

Yeah. The fact is that, chemically speaking, it's really not that dissimilar from rayon.

[Jordan Weissmann]

Once you make it into a sheet, it's panda. Charming qualities have been ironed out of it.

[Felix Salmon]

It's false advertising.

[Jordan Weissmann]

It is false advertising. I'm not trying to defend the retailers as much as the retailers have created this problem, in a sense, or the Marketers have created this problem by making people fall in love with bamboo, when obviously rayon does just as well. They should just learn to make people like rayon.

[Felix Salmon]

They should rename rayon.

[Jordan Weissmann]

Yeah, Rayon needs a brand new three O's or something.

[Jim Ledbetter]

Well, you see, rayon was named, like, I think around the same time as nylon, back when, like, chemicals were cool. And now chemicals are uncool.

[Jordan Weissmann]

Exactly. Make chemicals cool again and you make chemicals cool again.

[Jim Ledbetter]

In the meantime, for making chemicals, I.

[Felix Salmon]

Did forget to mention how environmentally horrible the K cups are. So I'll just throw that in right now. Let's. Let's fix that as well.

[Jordan Weissmann]

Leave bamboo to the pandas. We'll make our sheets out of rayon.

[Felix Salmon]

So my number is $100 million. And it's. It was actually already mentioned. I was a little bit worried that you guys would go so far as to mention my number before it was time. But it's the price that Alibaba is paying for the South China Morning Post.

[Jim Ledbetter]

China Morning. Is that an estimate? Is that the actual number?

[Felix Salmon]

Well, that's an estimate.

[Jim Ledbetter]

I think it's like one or two hundred million dollars, something around there. The South China Morning post is what, 112 years old? This venerable paper.

[Felix Salmon]

It's pretty old and it's won a lot of awards. And it's in English. It's printed in Hong Kong. And do we know the Cirque?

[Jordan Weissmann]

Do we know how big it is?

[Felix Salmon]

It's got 100,000 print circulation.

[Jordan Weissmann]

It's pretty small.

[Felix Salmon]

It's pretty small, but it's influential. So the Alibaba, which is like the China Amazon. Right. Those guys over there, they both want to influence how English speaking newspapers talk about China. And they claim that they're going to leave editorial independence to the South China Post. So. Morning Post. So it's kind of interesting.

[Jim Ledbetter]

This is. I mean, so on the one hand, you can spin this as the end of freedom of expression in Hong Kong, which was always this little island of freedom of expression in China. But on the other hand, I don't think there has actually been freedom of expression in Hong Kong for a while.

[Felix Salmon]

But it just might be gradually going away. Even any.

[Jim Ledbetter]

There wasn't very much anyway. And now there's even less.

[Felix Salmon]

Yeah, let's put it that way.

[Jim Ledbetter]

And I feel honor bound to do this. I kind of didn't want to, but because Jordan's not here, I need to step in.

[Felix Salmon]

Oh, it's so sweet. I know what it is.

[Jim Ledbetter]

And so, yeah, we're gonna. We're just gonna say that his best friend Martin Shkreli from Hunter High School. From Hunter High School went and bought Once Upon a Time in Shaolin, the Wu Tang's album, for $2 million. Because it's the only copy of the album, and this is much less than the Wu Tang originally wanted to sell it for. But it is still. My colleague Kelsey at Fusion did the back of the envelope sums on this one. It is still significantly more than they could reasonably have hoped to get by just releasing it.

[Jordan Weissmann]

Is that right? Two million bucks?

[Jim Ledbetter]

Yeah.

[Felix Salmon]

Is that really true? A famous rock group can't get 2 million bucks for an album?

[Jim Ledbetter]

Well, what is the world coming to?

[Jordan Weissmann]

I mean, they're only gonna get a percentage of sales, right? So you'd probably have to sell like, I don't know, 10 million or 5 million to get 2 million.

[Jim Ledbetter]

Their last album only sold 60,000.

[Jordan Weissmann]

Yeah. Yeah. They're a little past their prime. There too, was a group that was more than the sum of its parts. I think Old Dirty Bastard alone was probably worth more than Wu Tang.

[Felix Salmon]

Do you think Jordan is crying into his McDonald's coffee right now?

[Jim Ledbetter]

I think Jordan is trying to come to terms with the idea that if he ever wants to listen to this album, he's gonna have to hang out with Martin Shkreli. And Martin Shkreli was on the record saying, yeah, I haven't actually got around to listening to it yet, but if Taylor Swift wants to come around and listen to it, then I will. Oh, my God, he is. He really is the worst. He really is the worst human being. I will just end this podcast by saying the official motto of Slate Money is cash rules everything around me. On which note, we are going to bring this discursive episode of Slate Money to a close. A massive, huge thanks to the one and only Jim Ledbetter for coming in, for being amazing. And so, yes, subscribe to his podcast, Inc. Uncensored.

[Jordan Weissmann]

Thank you, Felix.

[Jim Ledbetter]

Because. Because no one. Because if you just. If you just read his magazine, Inc. Then there's censorship going on. But for the podcast, for the podcast, there's no censorship.

[Jordan Weissmann]

That's right.

[Jim Ledbetter]

Listen to the podcast. Many thanks to Zach Dynastein and Andy Bowers and Steve Lichti as the new executive producer of Panoply. So we have to thank him. He was deeply involved in this podcast, but he will be.

[Felix Salmon]

Blame him. Blame him.

[Jim Ledbetter]

All of the rest of Panoply's podcasts can be [e-mail] panoply and we'll talk to you next week on Slate Money. Everything around me green. Get the money Dollar dollar bill yo Everything around me Green get the money Dollar dollar bill, y' all.