Slate Money: The Mega-Merger Edition

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

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.

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)

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)

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).

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

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

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.