Marshmallow Investors: Are we shortchanging M&A value creation with a need for instant gratification?

By Bryan Kaus

Occidental Petroleum (NYSE: OXY) announced its first earnings post Anadarko acquisition; a net loss of $912 million - it should be noted, mostly on transaction costs. Still, criticism abounds.

This was nothing new. After a highly-publicized bidding process for Anadarko between Chevron (NYSE: CVX) and Oxy; what seemed like a done deal with Chevron, was disrupted with the entrance of Warren Buffet aiding Oxy’s bid, with an infusion of $10 billion, in exchange for 100,000 preferred shares.

Chevron got a $1 billion dollar breakup fee from Anadarko and returned capital to shareholders with buybacks, increasing its total program by 25% to $5 billion, so in the end, a win for their shareholders.

With the win in hand, there were some questions over whether or not the deal was a good one. For $38 billion, had Oxy overpaid? Would shareholders be rewarded? One article I read even questioned the ability of Vicki Hollub’s leadership with less than subtle sexist overtones – while it cannot and should not be ignored that as a female CEO in oil and gas, she is a relatively rarity, that should not set a different standard for her. Performance is performance.

Any time an acquisition is made, there are questions as to whether or not the move was good, whether the synergies (i.e. 1+1=3) upon which the deal was concocted are being realized. Are the shares performing?

These are good metrics and we need to know on data and financials whether or not expectations are being met.

That said, one thing that is woefully lacking, especially in the Twitter-era, is patience. You constantly hear a focus on a transaction having a value “immediately accretive” – get that benefit right out of the gate. That’s good. In a well-structured M&A deal, you would expect that. What is a little worrisome is the focus of some shareholders and media on short-term results. They want instant gratification. I suppose when you can order from Amazon and have something delivered to your doorstep in less than two hours, maybe there is some carryover of that gratification expectation.

Problem is, a company is much more complex and extracting full-integration value and synergies takes a little time to optimize beyond the theory of an M&A war room scenario. What assets do you keep? How do you integrate systems? Reality can vary greatly and not all results are magically realized – some degree of patience is often necessary to achieve maximum value.

To be clear, I do not dismiss the responsibility of Oxy to shareholders to produce results – they need to. And their management knows that (just read the transcript of their latest earnings call).

Problem I see is that this kind of pressure is not unique to Oxy.

What I worry about is the pressure some investors, analysts and media put on companies for instant results – are we shortchanging value creation? It brings to mind to Walter Mischel’s famous Marshmallow Experiment at Stanford. In the study on delayed gratification, a child was offered a choice between one small reward provided immediately or two small rewards if they waited for a short period, approximately 15 minutes. The children who were able to wait longer for the greater rewards tended to have better life outcomes.

It’s easy to go for a quick win – and if you are looking for a headline it could be easy to miss the greater opportunity. Same can be true for investors. I suppose it depends on the specific motives and timelines. Sometimes activist shareholders simply want quick cash. That, however, is at direct odds with the general mission of a major corporation, which generally is in the game of longer-term value creation over a broad time horizon.

We would do well to maintain that perspective – not shortening the leash on management too greatly, while also keeping them accountable to shareholders. In the end, the bounty will be far greater.

In life or in business we have options. We can focus on quick and rapid gains, but like an addict, the reward is often short-lived and we need to find our next fix. If we delay gratification, we find a greater magnitude of performance, value and are more likely to sustain those gains.

So… do you want one marshmallow now or a bounty in fifteen minutes?

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