It may be dumb to ask, but why sell any of your interest in Tencent if all you do is buy Prosus shares or some other “high-risk, low-return” business with the cash? In the same Business Day article, van Dijk said that Prosus looks at 5 000 companies each year doing 50 deals and that it was “super selective” but still finding good opportunities. Judging by the trends, it doesn’t look as if he’s right.
With capital allocation – a key management talent – Buffett has a typically humorous but trenchant view: “The skill with which a company’s managers allocate capital has an enormous impact on the enterprise’s value … CEOs ask advisors if an acquisition or two would make sense … that’s like asking your interior decorator if you need a $50 000 rug!”
He adds: “If a CEO has reached his position through an abundance of animal spirits and ego, they don’t disappear when he reaches the top. So, when encouraged to make deals, he responds much as would a teenage boy egged on by his father to have a normal sex life. It’s not a push he needs!”
As Buffett also observed, because firms compete with each other for acquisitions, they pay high premiums. They are grossly unbalanced. Shareholders of bought firms hit the jackpot; they increase the pay and status of the buying firm’s management; are a honeypot for bankers, lawyers, accountants and consultants; and destroy the wealth of buying firm’s shareholders because more intrinsic value is given up than received.