TIME Business

What Comcast’s Failed Merger Tells Us About Corporate Lobbying

The Comcast Corp. logo at a news conference in Washington on June 11, 2013.
Bloomberg via Getty Images The Comcast Corp. logo at a news conference in Washington on June 11, 2013.

The question is why anyone thought they had any chance of making this deal happen in the first place

When Comcast first announced its intent to merge with Time Warner Cable in early 2014, the conventional wisdom suggested that even though everyone knew it was a terrible, anti-competitive merger, Comcast would use its lobbying muscle to ram the deal through. After all, the company spends $17 million a year on lobbying. Its CEO, Brian Roberts, played golf with the President. Its chief lobbyist, David Cohen, organized a $1.2 million fundraiser for the President. Isn’t this how Washington works?

Now, with the news late last week that Comcast was backing out of the merger after regulators sent strong we-won’t-approve-this signals, everybody is trying to explain where the conventional wisdom got it wrong. Politico noted that, “opponents are hailing Comcast’s failed strategy as a welcome sign that money can’t buy everything in Washington.” Senator Al Franken (D-Minn.) attributed it to massive grassroots pressure: “We won because ordinary Americans can wield extraordinary power when they raise their voices.”

The simple reason that the merger failed was that Comcast and Time Warner Cable had a very weak case. But the key question is not why it failed. It’s why anyone thought they had any chance of making this deal happen in the first place.

The most likely explanation is that Comcast’s leaders over-estimated their influence. With so much in invested in lobbying, they had convinced themselves they could work magic in Washington. It’s an audacity that has come increasingly come to characterize corporate lobbying in Washington, as I describe in my new book, The Business of America is Lobbying. And it’s a big problem for our democracy, because it means we’re going to continue devoting our limited public policy attention to things we shouldn’t even be debating in the first place.

The New York Times’ Eric Lipton picked up on this arrogance in his post-mortem reporting. “Lawmakers and staff members on Capitol Hill, in interviews Friday, cited Comcast’s swagger in trying to promote this deal,” Lipton wrote. “They said they felt that Comcast was so convinced in the early stages that the deal would be approved that it was dismissing concerns about the transaction, or simply taking the conversation in a different direction when asked about them.”

Comcast’s over-confidence, however, is understandable. After all, the company had successfully navigated the challenges of a previous merger with NBC Universal. Comcast had 128 lobbyists in Washington in 2014, enough to weigh in on a stunning range of issues – reaching as far afield as the farm bill, and numerous tax issues. It could flood the zone, and be everywhere, all the time. In an interview with Politico, Rep. Tony Cárdenas (D-Calif.) marveled, “I’ve had companies come and sit with me and they would tell me that, ‘Oh, we heard in the hallways that Comcast knew we were having this meeting today.’” He continued, “And my staff and I are looking at each other like, ‘We sure as hell didn’t tell them anything.’ But that’s how they’ve blanketed Washington.”

Comcast had also bolstered its sense of influence by building up what it called “community partners” – mostly civil rights groups like the National Council of La Raza or the National Urban League, which received generous contributions from the Comcast Foundation. In return, these key Democratic constituency groups had offered their support for Comcast’s top priorities in Washington.

Clearly Comcast miscalculated in the case of this merger. In retrospect, it seems remarkable that the Justice Department would ever have endorsed the country’s top two cable operators’ merging in a way that would give a single company control of 57 percent of the national broadband market and 30 percent of the pay television market. It also seems remarkable that two companies as deeply unpopular as Comcast and Time Warner Cable thought they could convince members of Congress to ignore the widespread customer dissatisfaction.

Yet, somehow, Washington spent more than a year debating this issue, sucking up countless precious resources of time and energy both inside Congress in the larger advocacy community. Over the last 12 months, at least according to Google Trends, the “Comcast merger” has generated about as much interest as “global poverty.”

This data point can stand in for a larger problem. Corporations are the dominant actors in Washington, period. Business spends about $2.6 billion a year on reported lobbying – about 80 percent of the total lobbying expenditures and roughly 34 times the meager sums spent on lobbying by public interest groups and labor unions combined. This means that large corporations mostly drive the agenda.

Companies like Comcast and Time Warner Cable have the resources and arrogance to get Congress to seriously consider a proposal this outlandish. It’s a privilege few have. And worse, this policy aggression is a self-perpetuating cycle. The more these big companies spend, the more lobbyists they hire to make the case internally that the company ought to pick a big fight. And so they pick bigger fights, necessitating even more lobbyists.

Yet, while Comcast and Time Warner Cable may have just wasted tens of millions of dollars on lobbying, one group made out quite well: the lobbyists and consultants themselves who got paid to run their campaign, and who keep getting paid to perpetuate the cycle of ever-more ambitious lobbying. Notably, after the deal fell apart, Comcast’s CEO issued a press release showing his confidence in the company’s top lobbyist: “There is nobody better than David Cohen,” Brian Roberts wrote. “He’s incredible at what he does and we are beyond lucky that he helps passionately lead so many areas at Comcast.”

And while Comcast provoked a large public outcry due to its widespread unpopularity, few companies and mergers have anywhere close to the same potential for grassroots counter-mobilization. The biggest merger deal of 2014, like almost all big mergers, went largely unnoticed by the public (For those keeping score, that deal was a $76 million mega-merger between four energy companies that made the biggest energy infrastructure company, Kinder Morgan, even bigger. Kinder Morgan is not the household name Comcast is.) Mobilizing the public can be an effective tool where the public cares. But that only covers a limited number of issues in Washington.

Opponents of the Comcast-Time Warner Cable merger deserve to celebrate, at least a little. They were persistent in making sure that common sense stayed common sense, challenging as that sometimes is. But it was a rear-guard action – a battle that they never should have had to fight. Especially when currently more than half of U.S. households have only one broadband option, and across the U.S., we pay more for worse service than most other advanced industrial economies. Then again, this status quo should explain why Comcast ‘s leaders were so emboldened in the first place.

Lee Drutman is a senior fellow in the program on political reform at New America. This piece was originally published in New America’s digital magazine, The Weekly Wonk. Sign up to get it delivered to your inbox each Thursday here, and follow @New America on Twitter.

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MONEY Airlines

The Pathetic State of Airline Travel Today Was Predicted Long Ago

crowded airplane seats
Jason Hetherington—Getty Images

No one should be remotely surprised that flights today are more crowded and more expensive, with more fees and worse service. As many critics warned, this is exactly what would happen with widespread airline consolidation.

The airline business is complicated. To some extent, however, making a profit is as simple as getting as many passengers on board your company’s airplanes as possible, and charging each customer as much as possible for the services provided.

Lately, airlines have been extremely good at being profitable. Airline profits soared in 2014 amid plummeting fuel prices, and the trend has continued in 2015. The first quarter of the year is generally a slow, lackluster period in travel, yet most domestic airlines reported record-high profits for the first three months of 2015. American Airlines reportedly took in a profit of $1.2 billion in the first quarter, according to the Dallas Morning News; previously, the carrier’s best first quarter was a haul of a mere $480 million.

Historically, in a scenario like the one outlined above, airline executives could be relied upon to add flights and new routes, and/or cut airfares, with the goal of winning over new passengers and snagging market share. None of the above is happening, however. For an explanation of why this is so, look no further than the string of airline mergers that took place in recent years—and that effectively killed the robust competition that existed in the industry not long ago.

“The airline industry is increasingly looking like an uncompetitive oligopoly,” Andrew Ross Sorkin wrote in a recent New York Times analysis. Sorkin pointed to the insights of analyst Vinay Bhaskara, who in late 2014 wrote in Airway News, “We are unquestionably living in an air travel oligopoly,” in which virtually all power in the industry lies in the hands of very few players.

“I will go on record stating that I believe that 2015 will be yet another year of record profitability for US airlines,” Bhaskara wrote at the end of 2014. Based on the first quarter results, his predictions appear to be coming true. As for the idea that airlines would expand service to take advantage of low fuel prices and attempt to win over business from their competitors? Let’s just say no one should go holding their breath waiting for heated competition and price wars anytime soon. “The idea that US airlines would, once again, devolve into a war for market share is founded on a misunderstanding of the new structure of US airlines.”

This “new structure” is one in which airlines are rigorously maintaining “discipline,” as Bhaskara puts it. This highly profitable approach is one in which the airlines aren’t expanding service because they prefer to fly densely packed planes, and they aren’t cutting fares because, well, they just don’t have to as demand remains high.

The approach might come across as greedy and opportunistic. But it shouldn’t come as a surprise. After all, the marketplace we have today is one that was predicted years ago by airline merger critics. Back in 2010, when United Airlines was close to completing its acquisition of Continental, consumer advocate Bill McGee published a manifesto about the ramifications of such mergers. Among other things, his analysis showed:

When merger partners’ route maps overlap, certain cities will lose service, with fewer flight frequencies and loss of nonstops.

Airline mergers don’t improve customer service.

When one airline suddenly dominates a route where it previously competed with a merger partner, ticket prices are likely to rise—often considerably.

Likewise, over the years various consumer groups and business travel coalitions have urged regulators to stop mergers from taking place for largely the same reasons. And, based on the routinely oligopolistic tactics of airlines in the post-merger world, in which travelers based in cities like Cleveland, Pittsburgh, and St. Louis have seen dramatic reductions in flights, and in which average flights in the U.S. have pushed past $500 (not including fees), the critics sure do seem to have been on to something.

Most unfortunate of all, the average airline customer should only expect more of the same approach going forward. Instead of adding flights, “Almost all of our capacity growth domestically is about putting more seats on airplanes,” American Airlines president Scott Kirby explained in a recent investment conference. “We will absolutely not lose our capacity discipline,” or the practice of limiting expansion in order to keep airfares high, United CEO Jeff Sismek said earlier this year, while announcing the company had nearly doubled profits in 2014.

Thanks to seat design “innovations,” airlines are able to cram more and more tiny seats into economy sections. This obviously makes flying worse, but that’s not stopping airlines from going forward. “When it comes to passenger comfort, the airlines are saying that this isn’t something that’s very important to them,” Eric Gonzales, an engineering professor at UMass-Amherst specializing in transportation issues, said to the Los Angeles Times. “These changes are intended solely to improve the bottom line.”

If the airline space were more competitive, it would arguably be a lot more difficult for carriers to get away with this kind of stuff. Yet they get away with this and more, including all manner of fees for services that used to be covered in the price of a ticket, plus a range of cost-cutting steps that show through in the results of a new study indicating that customer complaints, lost bags, lateness, and overbooking were all up in 2014.

As if it isn’t already clear, Brent Bowen, dean of the College of Aviation at Embry-Riddle Aeronautical University and a co-author of the study, explained how we got to this point: “Airline mergers and consolidations are taking a systemic toll that is bad for consumers… Performance by the airlines is slipping while they claimed this would make them better.”

TIME Companies

Comcast Reportedly Dropping Time Warner Cable Deal

The Comcast Corp. logo is seen as Brian Roberts, chairman and chief executive officer of Comcast Corp. (R) speaks during a news conference in Washington on June 11, 2013.
Bloomberg/Getty Images The Comcast Corp. logo is seen as Brian Roberts, chairman and chief executive officer of Comcast Corp. (R) speaks during a news conference in Washington on June 11, 2013.

The deal would have combined the nation’s two largest cable companies

Comcast plans to drop its $45 billion takeover bid for Time Warner Cable in the face of opposition from U.S. regulators, Bloomberg reported on Thursday, citing people with knowledge of the matter.

Comcast could make a formal announcement signaling the end of the deal as soon as Friday, according to a Bloomberg report citing anonymous sources. The deal, which was announced last February, would have combined the nation’s two largest cable companies in a merger with the potential to reshape the media landscape.

The news followed a report from The Wall Street Journal, which said early Thursday that staff at the Federal Communications Commission have recommended that the merger, which requires government approval, be put before an administrative law judge — an indication that the FCC views the potential deal as not being in the public’s best interest.

On Wednesday, executives from the two companies sat down with Justice Department officials to discuss the proposed deal, which was supposed to combine the country’s No. 1 and No. 2 cable providers into one entity, giving them control of nearly 30% of the pay TV market.

The two companies’ bid to unite has been in the works for some time. Here are some of the key moments that led up to the decision to join forces.

This article originally appeared on Fortune.com.

TIME Telecom

Why Nokia’s Blockbuster Merger Turned Into Such a Mess

Nokia's chairman Risto Siilasmaa, Nokia's Chief Executive Rajeev Suri, telecommunications company Alcatel-Lucent's Chief Executive Officer Michel Combes and Alcatel-Lucent's chairman of the supervisory board Philippe Camus shake hands prior a press conference on April 15, 2015 in Paris.
Chesnot—Getty Images Nokia's chairman Risto Siilasmaa, Nokia's Chief Executive Rajeev Suri, telecommunications company Alcatel-Lucent's Chief Executive Officer Michel Combes and Alcatel-Lucent's chairman of the supervisory board Philippe Camus shake hands prior a press conference on April 15, 2015 in Paris.

Nokia marrying Alcatel-Lucent will have a huge impact

The big headlines in tech M&A come when they involve growth – Facebook buying Instagram or WhatsApp, for example – but more often they tie together two aging companies in established but still important industries. Ideally, in those cases, the merging partners will complement each other’s weaknesses, making for a stronger corporate marriage.

Take the mature but competitive telecom-equipment industry. If selling and maintaining the arcane gear that quietly keeps the Internet humming is hardly a sexy industry, it’s crucial if you want to watch a video of a dog trying to catch a taco in its mouth. Last week, when one industry giant (Nokia) offered to merge with another (Alcatel-Lucent) in a $16.6 billion deal, it seemed like a textbook tech M&A deal, one that analysts have been expecting for years.

Instead, the announcement of the deal seems to have left everyone unhappy. Analysts lined up to argue why the tie-up would be troubled, while investors wasted little time in selling off shares of both companies. Since the deal was announced Wednesday, Nokia’s shares have lost 4% of their value and Alacatel-Lucent’s have lost 21%.

This is the rare M&A deal that everyone has long-expected to happen and yet seems to please almost nobody. The telecom-equipment sector has been rife with consolidation and restructuring for years, as companies scramble to grab control of technologies that power broadband, wireless networks, networking software and cloud infrastructure.

Both Nokia and Alcatel-Lucent have been undergoing wrenching restructuring to compete with Sweden’s Ericsson, the market leader, and China’s up-and-comers Huawei and ZTE. Nokia sold its handset business to Microsoft for $7.2 billion in 2013, which helped return the company to profitability last year. Now that Nokia is alsoshopping around its mapping software, a merger seems like an important step toward strengthening its remaining operations in the telecom-equipment business.

Alcatel-Lucent has been having a harder time in the past decade. In 2006, the stock of France’s Alcatel was trading near $16 a share when it paid $13 billion for US-based Lucent. But clashing cultures, rigid bureaucracies and a failure to innovate led to years of losses at the combined firm, pulling Alacatel-Lucent’s stock down as low as $1 a share. Years of restructuring brought tens of thousands of job cuts but also, in recent quarters, signs the company may be making a fragile comeback.

So why did everyone expect a Nokia-Alcatel merger to work when the Alcatel-Lucent one failed? For one, there was a complementary fit in terms of the product and geographical markets both companies served. Also, both companies had just emerged from painful restructurings holding smaller shares of a competitive market. By combining, they could command a market share rivaling Ericsson’s and also marshall resources needed for the high R&D costs of next-generation gear.

That was the theory on paper, and for years reports surfaced periodically that the two were talking about joining forces. Talks of Nokia buying Alcatel’s wireless business fell through in 2013, and another report of a merger last December went nowhere. Now that it’s happening, the conversation has shifted from speculation about the deal to the details of how it would work. And some of the details aren’t pretty.

Any large-scale tech merger requires years of integration of sales, engineering and managerial ranks. In the best case, it takes years to complete. In the worst, it leads to entrenched fiefdoms and a bureaucratic hall of mirrors. And in areas where there is overlap, job losses will follow. But Alcatel-Lucent is partly owned by the government of France, which sees the company as a strategic national asset. It will fight massive post-merger layoffs in France, and the Finnish government is likely to do the same.

Analysts expect the trouble that all this work involves will hamper Nokia for some time. Some argued Nokia should have bought only Alcatel’s wireless assets, but since that didn’t didn’t work Nokia offered a discount for the whole company. And what a discount: Nokia’s bid is worth only 0.9 times Alcatel-Lucent’s revenue last year, well below the average figure of 2.5 times revenue for recent telecom deals. Alcatel-Lucent’s shareholders feel the discount is too much, leading to last week’s selloff.

So as inevitable as a combination of Nokia and Alcatel-Lucent seems, there are regulatory, integration and cultural issues that will complicate things for years. In the meantime, few investors are pleased about the deal. Throwing these companies together may be like, well, that taco heading toward the dog’s mouth: the appetite is there, but in the end all you have is a mess.

TIME Companies

Kraft and Heinz Merge to Become World’s 5th Largest Food Company

The companies announced the deal Wednesday

Kraft Foods Group, which makes Oscar Mayer meats and macaroni-and-cheese products, will merge with ketchupmaker H.J. Heinz Co. to become the fifth largest food-and-beverage company in the world and the third largest in the U.S.

The new company, the Kraft Heinz Co., will be co-headquartered in the Chicago and Pittsburgh areas and will have revenues of roughly $28 billion, the companies announced in a statement Wednesday. Eight of its combined brands will be worth more than $1 billion each, while five will be worth approximately $500 million to $1 billion each.

Berkshire Hathaway Inc. and Brazilian private-equity firm 3G Capital, which co-own Heinz, will invest an additional $10 billion into the merged company, of which current Heinz and Kraft shareholders will collectively own 51% and 49% respectively. Kraft shareholders will also receive special cash dividends of $16.50 per share.

“This is my kind of transaction, uniting two world-class organizations and delivering shareholder value,” Berkshire Hathaway chairman and CEO Warren Buffett said in a statement. “I’m excited by the opportunities for what this new combined organization will achieve.”

TIME Companies

Expedia Snaps Up Travelocity for $280 Million

The Expedia Inc. homepage and logo.
Bloomberg—Getty Images The Expedia Inc. homepage and logo.

Another travel site Orbitz is reportedly looking for a buyer as well

Two major travel sites are about to be under the same corporate umbrella.

Expedia will be purchasing rival Travelocity for $280 million in cash. The two sites have been working together since 2013, when they signed a marketing agreement allowing Travelocity access to Expedia’s supply and customer service program in exchange for Expedia powering the technology platforms for Travelocity’s websites in the US and Canada.

Travelocity is currently owned by travel technology company Sabre. Sabre also owns Sabre Airline Solutions, Sabre Travel Network, and the Sabre Hospitality Network. Expedia’s brand portfolio includes the popular Expedia.com, plus other properties including Hotels.com and Hotwire.com.

More deals could be coming in the online travel booking arena. Orbitz is said to be actively looking for a buyer.

This article originally appeared on Fortune.com.

TIME mergers

Family Dollar Shareholders Approve Dollar Tree Takeover

Inside A Family Dollar Store Ahead Of Earnings Figures
Ben Torres—Bloomberg/Getty Images A man walks into a Family Dollar Stores Inc. location in Mansfield, Texas on Jan. 7, 2014.

The vote sidelines Dollar General’s competing offer, in favor of long-term growth over immediate earnings

Family Dollar’s shareholders have overwhelmingly approved a $8.5 billion takeover bid by rival discount chain Dollar Tree, a vote that sidelines Dollar General’s competing offer.

At the vote held in North Carolina, investors holding 74% of Family Dollar’s total outstanding shares voted in favor of the proposal, an outcome that Chairman and CEO Howard Levine praised. The merger still requires approval from the Federal Trade Commission, and that could come as soon as March.

The discount-retail sector has been the subject of a complicated and drawn out love triangle that has made headlines since July, when Dollar Tree initially made a play for Family Dollar in a cash-and-stock deal. But rival Dollar General swooped in with a competing offer, saying it would pay $80 per share for Family Dollar while Dollar Tree has stuck with its original $74.50 cash-and-stock offer.

While the Dollar General offer guarantees a higher price paid to shareholders, the vote ultimately asked investors to consider the growth potential of a merged Family Dollar-Dollar Tree (if they are willing to stick with their investment) over the long term.

Dollar Tree also lauded the outcome, while Dollar General was unsurprisingly disappointed.

“Today’s vote is a loss not only for Family Dollar shareholders, but also for consumers across the country who will not have the opportunity to benefit from the cost savings and efficiencies that we believe would have been created by a merger between Dollar General and Family Dollar,” said Rick Dreiling, Dollar General’s CEO and chairman.

The Dollar Tree bid also comes with fewer headaches, as the merged company would need to unload far fewer stores than if Dollar General had been successful, with divestitures needed from both proposals to win backing from the FTC.

Investors were finally persuaded the Dollar Tree deal was the right course to pursue. The Family Dollar vote had been postponed at one point because there hadn’t been enough votes to adopt the Dollar Tree merger, which Family Dollar has backed since the beginning. Since then, two influential shareholder advisory firms — Institutional Shareholder Services and Glass Lewis — have thrown their support behind the Dollar Tree bid.

Dollar Tree’s offer was a roughly 23% premium over Family Dollar’s trading price at the time the offer was officially made. The combined company will generate annual sales of about $18 billion, putting it slightly above Dollar General and making it a larger rival to Wal-Mart and other stores that sell goods at low prices. Dollar Tree sells everything in its stores for $1 or less, while Family Dollar has multiple price points to court value-conscious shoppers.

While the Family Dollar winner had remained in doubt for months, one clear winner was activist investor Carl Icahn. Icahn last year called on Family Dollar to put itself up for sale immediately, and at one point held a 9.4% stake in the company. He scored a reported $200 million profit on his investment when a bidding war broke out shortly after he lamented the retailer’s underperformance.

This article originally appeared on Fortune.com.

MONEY mergers

Why Verizon Wants to Buy AOL

The Aol Inc. application is displayed on a Verizon iPhone.
Andrew Harrer—Bloomberg via Getty Images

It's because Aol isn't the company you remember.

According to a report in Bloomberg News, Verizon has approached Aol with an interest in either pursuing a joint venture or acquiring the company outright.

This might come as a surprise to anyone who remembers Aol for what it used to be: namely, a dotcom-era dinosaur that depended on dial-up subscribers to keep the lights on. Why would Verizon want anything to do with that?

Resurgence

Aol has gradually become a completely different company since welcoming CEO Tim Armstrong in 2009. Since then, Armstrong has turned Aol into one of the most successful advertising technology companies on the planet.

Aol Platforms, the company’s advertising wing, made $271 million in revenue during the third quarter of 2014—a 44% year-over-year increase in revenue. That’s the kind of growth one expects from the next hot startup, not a business founded more than 30 years ago.

Platforms is still slightly in the red, and the company currently makes more profit from subscribers and its media holdings, which include The Huffington Post, Engadget, and TechCrunch. But that’s expected to change rapidly as Aol’s advertising business continues to expand and press its advantage over competitors in the ad tech game.

The Best Ad Tech in Town

As Brian Pitz, an analyst at Jefferies covering Aol, previously told MONEY, Aol is one of very few “one-stop shops” for all advertising needs. The company’s offerings include analytics, tools for sellers, tools for buyers, and a number of other services, all in one place.

In doing so, Aol saves marketers and publishers money by cutting out what it calls the “technology tax”—the extra money both sides pay for using various middlemen to accomplish the same tasks. Aol is “a fully integrated [advertising] platform,” Pitz says. “The only other company that has that is Google.”

Verizon’s Interest

Verizon has previously expressed interest in launching a digital video service, possibly as soon as mid-2015, and there’s no question Aol’s advertising prowess could be of use in that endeavor. Aol has consistently been a top performer in video advertising, with the company’s ads reaching 53.8% of the U.S. population, according to a November comScore report.

Bloomberg’s Alex Sherman notes that Verizon has also been been in talks with other ad technology companies, including Yahoo. Investors have been urging Yahoo for months to merge with Aol, primarily because of Aol’s ad technology business.

While advertising technology, particularly for mobile video, is the key driver of Verizon’s interest, Sherman also speculated that the ISP could convert some of Aol’s remaining dial-up subscribers to its own internet service through a full acquisition.

MONEY stocks

How to Pick the Winner in a Corporate Spinoff

two men on a bike pedaling in opposite directions
Taylor Callery

For reasons good and bad, companies are dividing in two. Keep your eye on the smaller stock.

If you’re a Hewlett-Packard share­holder, your head may be spinning. In October, CEO Meg Whitman announced HP would split off its PC and prin­ter division from its technology services business so each side would gain “independence, focus, financial resources, and flexibility.”

Sounds plausible. Except three years ago she argued against this move—which was recommended by her predecessor Léo Apoth­eker—claiming that it would lead to billions of dollars in wasted costs.

Ignore the Hype, Not the Stock

This kind of CEO flip-flop may turn you off. So might Wall Street’s perpetual cycle of mergers and acquisitions, split-ups, and then new mergers. This year, M&As and spinoffs are both surging.

That said, spinoffs like Hewlett-Packard’s are the one kind of deal with a good record. “While the data is overwhelming that the average acquisition destroys shareholder value, the average spinout tends to work well,” says Christopher Davis, chairman of Davis Advisors.

Focus on What’s Being Spun

Pat Dorsey, founder of Dorsey Asset Management, says, “There comes a point when mature companies take a hard look at themselves and say, ‘We need hair dye.’ ” Often, this means concentrating on the faster-growing division. In HP’s case, that’s the tech services business, which will be dubbed Hewlett-Packard Enterprise. Whitman will be its CEO.

The spun-off hardware division will be called HP Inc.  It offers less earnings growth—but might be the better buy. A 2004 Purdue study of breakups from 1965 to 2000 found that while parent companies don’t meaningfully outperform their peers on average, spinoffs do, especially in the first couple of years. A Bloomberg index of spun-off stocks has outpaced the S&P 500 by five percentage points annually over the past 10 years.

Why? Spun-off companies are usually smaller, and history says there’s a small-stock advantage. Also, if the spinoff is unloved by the parent, it’s likely to be overlooked by fund managers and analysts, especially in the early going, Dorsey says. This creates an opportunity for bargain hunters.

Of course, “not every spin works,” says Joe Cornell, founder of the advisory firm Spin-Off Advisors. (And full disclosure: MONEY is owned by Time Inc., which was split off this year by Time Warner.)

What about Hewlett-Packard Enterprise? Dorsey, for one, can’t imagine it will grow as fast as Whitman hopes. “Servers and consulting—that’s what IBM does,” he says. “Have they looked at how IBM has been doing lately?” That stock is down 14% this year.

 

TIME Companies

Hasbro in Talks to Acquire DreamWorks Animation

Deal would combine the makers of Transformers and Shrek

Hasbro is in talks to buy DreamWorks Animation, in a move that could help it reclaim its position as the world’s No. 1 toymaker from Lego, according to the Hollywood website Deadline.com.

The deal would combine the maker of the Transformers set of toys (as well as board games like Monopoly, Scrabble and Trivial Pursuit) with the studio that produced the Shrek and Madagascar series of films, allowing the toys and movies operations to feed off each other. Deadline said the deal would take at least two months to wrap up.

Deadline reported that Hasbro’s board had visited the DWA campus recently, and had agreed in principle that DWA co-founder Jeffrey Katzenberg would chair the combined operation.

At the same time, Deadline said, DWA is also looking at a joint venture with Hearst Publishing including its AwesomenessTV, valuing it at around $300 million. The mooted JV would aim to launch three new digital channels, targeting mothers and children.

This article originally appeared on Fortune.com

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