“I firmly believe that acquisitions are an addiction, that once companies start to grow through acquisitions, they cannot stop. Everything about the M&A process has all the hallmarks of an addiction. If you look at the collective evidence across acquisitions, this is the most value destructive action a company can take.”
- Aswath Damodaran
Earlier this week, Dollar Tree announced it was spinning off its Family Dollar unit, which it acquired in 2015. Companies spinning off holdings aren’t uncommon. In fact, companies divesting units acquired within the past decade also aren’t unusual. But most importantly (and sadly), companies selling off former acquisitions at significant losses are incredibly common. We will get into those details later, but let's first take a look at the Dollar Tree/Family Dollar debacle.
In 2015, the Dollar Tree Board of Directors issued the following statement to the management of Family Dollar.
“The Board of Directors of Dollar General is pleased to submit a proposal to you and the Board of Directors of Family Dollar that offers Family Dollar shareholders $78.50 per share in cash for all outstanding shares, providing them with superior value and immediate and certain liquidity for their shares. Not only is our offer superior in price, it is 100% cash, as compared to the mix of cash and stock being offered by Dollar Tree.
Our proposal provides Family Dollar’s shareholders with approximately $466 million of additional aggregate value over Dollar Tree’s offer and represents a premium of 29.4% over the closing price of $60.66 for Family Dollar stock on the day prior to the Dollar Tree announcement.” (Emphasis is mine)
The concept was that by partnering with Family Dollar, Dollar General could create a low-cost giant that significantly expanded its customer base, achieved cost savings through those elusive “synergies, " and kept Dollar General in check. The latter had made an earlier bid for Family Dollar.
The acquisition worked out poorly from day one. The synergies the company thought could be achieved were a mirage. Family Dollar stores were in extremely poor condition, plagued by inadequate maintenance, high refurbishment costs, and excessive overlap with Dollar General locations. How this could not be foreseen is a mystery. Too put a punctuation point on how badly the Family Dollar maintenance had fallen, the company was forced to pay $42M in fines after regulators found a supply warehouse overrun by live, dying, dead, and rotting rats. Wall Street started to lose confidence in the deal and the company’s management at the same time. Over the past three years, Dollar General’s stock has declined by 63% in value.
After attempting to staunch the bleeding by closing hundreds of locations and investing considerable capital to upgrade the Family Dollar brand and shopping experience, Dollar General raised the white flag and announced this week that it is selling the entire Family Dollar brand to private equity groups Brigade Capital Management and Macellum Capital Management for approximately $ 1 billion. If you calculate the cost of $78.50 for every publicly traded share of Family Dollar in 2015, Dollar General paid around $9 billion for its acquisition. It should be emphasized that they paid in cash. The Dollar General Board issued the following statement earlier this week to announce the sale:
“The Dollar Tree leadership team and Board of Directors determined that a sale of Family Dollar to Brigade and Macellum best unlocks value for Dollar Tree shareholders and positions Family Dollar for future success.”
It may have been better if the Board had rephrased the statement to indicate that they had determined the sale would result in a $900M cash loss instead of unlocking value for Dollar Tree shareholders.
M&A: A Destructive Addiction
KPMG (the consulting/accounting behemoth) examines acquisitions annually to assess their success and questions whether they have generally been effective or ineffective at creating shareholder value. The short answer is that they are not effective at all. However, that information doesn’t reach the C-suite or boardrooms. There is a significant disparity between management's perception of their success rate and the actual rate. This “perception gap” is remarkably wide - 93% of companies surveyed by KPMG believed their deals enhanced value, and over a third stated they would not approach their next deal any differently. Yet, KPMG's objective analysis of whether deals enhanced or reduced value revealed that only 31% of these deals actually enhanced value.[1] Wow. Even after all these statistics, most Boards wouldn’t change a thing regarding conducting acquisitions.
Examining the history of mergers and acquisitions reveals that Dollar General’s disastrous acquisition of Family Dollar is merely typical of Wall Street’s M&A activity. Here are some interesting facts.
At a Columbia Business School symposium, a presenter noted that M&A completed in any given year’s “hot/fad” markets had a 2-3 times greater chance of failure than those in more stable markets.
Conclusions
Dollar General’s acquisition of Family Dollar was typical when it was announced. The company grossly overpaid after conducting inadequate due diligence. In its press release, you can almost hear the frantic panting of management fearing it would be outdone by Dollar Tree. The spin-off of Family Dollar earlier this year marks the conclusion of a saga that severely damaged Dollar General’s financials, consumed far too much attention from the company’s C-Suite and Board, and inadvertently aided its competitor through its misstep.
At Nintai Investments, we typically sell a holding if it announces a large M&A deal. We feel even more strongly when they use words like transformative, synergies, or maximizing shareholder value. A recent example is Masimo’s (MASI) acquisition of Sound United. Masimo possessed an exceptional business with a moat developed around its oximeter technology (the device you place on the tip of your finger to measure your oxygen saturation rate), generating high returns on invested capital and maintaining a balance sheet with no short- or long-term debt. Management went out and acquired a consumer electronics company with the intent of transforming (there’s that word!) their business model into an ambulatory home health company. Less than two years later, the company announced it was splitting into a consumer audio and a consumer healthcare company. It appears much like the two companies did before the acquisition. The announcement included the typical “maximizing shareholder value” language. We sold a few weeks after the acquisition announcement was made, viewing it as a method of destroying a perfectly wonderful small-cap, wide-moat company. We’re very happy we did.
Whenever you hear management announce an M&A deal that promises to transform the business or achieve significant cost savings through synergies, consider carefully whether you want to partner with that management. Ultimately, they are likely to change the company, though not in the way they envisioned. As Mr. Damodaran mentioned, this kind of addiction can be very costly for the company’s and acquisition’s employees, their management, and most importantly, their shareholders.
Disclosure: Nintai Investments does not own any shares in the companies mentioned in this article and does not intend to purchase them in the next 60 days since publication.
[1] “The Morning After: Driving for Post-Deal Success,” KPMG Transaction Services, 2024
- Aswath Damodaran
Earlier this week, Dollar Tree announced it was spinning off its Family Dollar unit, which it acquired in 2015. Companies spinning off holdings aren’t uncommon. In fact, companies divesting units acquired within the past decade also aren’t unusual. But most importantly (and sadly), companies selling off former acquisitions at significant losses are incredibly common. We will get into those details later, but let's first take a look at the Dollar Tree/Family Dollar debacle.
In 2015, the Dollar Tree Board of Directors issued the following statement to the management of Family Dollar.
“The Board of Directors of Dollar General is pleased to submit a proposal to you and the Board of Directors of Family Dollar that offers Family Dollar shareholders $78.50 per share in cash for all outstanding shares, providing them with superior value and immediate and certain liquidity for their shares. Not only is our offer superior in price, it is 100% cash, as compared to the mix of cash and stock being offered by Dollar Tree.
Our proposal provides Family Dollar’s shareholders with approximately $466 million of additional aggregate value over Dollar Tree’s offer and represents a premium of 29.4% over the closing price of $60.66 for Family Dollar stock on the day prior to the Dollar Tree announcement.” (Emphasis is mine)
The concept was that by partnering with Family Dollar, Dollar General could create a low-cost giant that significantly expanded its customer base, achieved cost savings through those elusive “synergies, " and kept Dollar General in check. The latter had made an earlier bid for Family Dollar.
The acquisition worked out poorly from day one. The synergies the company thought could be achieved were a mirage. Family Dollar stores were in extremely poor condition, plagued by inadequate maintenance, high refurbishment costs, and excessive overlap with Dollar General locations. How this could not be foreseen is a mystery. Too put a punctuation point on how badly the Family Dollar maintenance had fallen, the company was forced to pay $42M in fines after regulators found a supply warehouse overrun by live, dying, dead, and rotting rats. Wall Street started to lose confidence in the deal and the company’s management at the same time. Over the past three years, Dollar General’s stock has declined by 63% in value.
After attempting to staunch the bleeding by closing hundreds of locations and investing considerable capital to upgrade the Family Dollar brand and shopping experience, Dollar General raised the white flag and announced this week that it is selling the entire Family Dollar brand to private equity groups Brigade Capital Management and Macellum Capital Management for approximately $ 1 billion. If you calculate the cost of $78.50 for every publicly traded share of Family Dollar in 2015, Dollar General paid around $9 billion for its acquisition. It should be emphasized that they paid in cash. The Dollar General Board issued the following statement earlier this week to announce the sale:
“The Dollar Tree leadership team and Board of Directors determined that a sale of Family Dollar to Brigade and Macellum best unlocks value for Dollar Tree shareholders and positions Family Dollar for future success.”
It may have been better if the Board had rephrased the statement to indicate that they had determined the sale would result in a $900M cash loss instead of unlocking value for Dollar Tree shareholders.
M&A: A Destructive Addiction
KPMG (the consulting/accounting behemoth) examines acquisitions annually to assess their success and questions whether they have generally been effective or ineffective at creating shareholder value. The short answer is that they are not effective at all. However, that information doesn’t reach the C-suite or boardrooms. There is a significant disparity between management's perception of their success rate and the actual rate. This “perception gap” is remarkably wide - 93% of companies surveyed by KPMG believed their deals enhanced value, and over a third stated they would not approach their next deal any differently. Yet, KPMG's objective analysis of whether deals enhanced or reduced value revealed that only 31% of these deals actually enhanced value.[1] Wow. Even after all these statistics, most Boards wouldn’t change a thing regarding conducting acquisitions.
Examining the history of mergers and acquisitions reveals that Dollar General’s disastrous acquisition of Family Dollar is merely typical of Wall Street’s M&A activity. Here are some interesting facts.
- Dollar General’s recent announcement that it is spinning off Family Dollar only seven years after acquiring the company isn’t particularly surprising - half of all mergers are reversed within 10 years.
- McKinsey reports that approximately half of acquirers significantly fail in their due diligence work. In one of their latest studies (M&A Insights, February 2025), the company reveals that nearly three-quarters of recent technology M&A encounters have failed during the due diligence research.
- Trends pushed by large consulting firms drive much M&A activity. A case in point is the latest surge in artificial intelligence (AI) merger activity. KPMG featured the headline: “KPMG and HP make M&A integration easier by harnessing AI and automation technologies.” Gartner reports, “GenAI MActivity will lead the way.” Lastly, OutSystems states, “AI M&A: The Biggest Deals Yet?”
At a Columbia Business School symposium, a presenter noted that M&A completed in any given year’s “hot/fad” markets had a 2-3 times greater chance of failure than those in more stable markets.
Conclusions
Dollar General’s acquisition of Family Dollar was typical when it was announced. The company grossly overpaid after conducting inadequate due diligence. In its press release, you can almost hear the frantic panting of management fearing it would be outdone by Dollar Tree. The spin-off of Family Dollar earlier this year marks the conclusion of a saga that severely damaged Dollar General’s financials, consumed far too much attention from the company’s C-Suite and Board, and inadvertently aided its competitor through its misstep.
At Nintai Investments, we typically sell a holding if it announces a large M&A deal. We feel even more strongly when they use words like transformative, synergies, or maximizing shareholder value. A recent example is Masimo’s (MASI) acquisition of Sound United. Masimo possessed an exceptional business with a moat developed around its oximeter technology (the device you place on the tip of your finger to measure your oxygen saturation rate), generating high returns on invested capital and maintaining a balance sheet with no short- or long-term debt. Management went out and acquired a consumer electronics company with the intent of transforming (there’s that word!) their business model into an ambulatory home health company. Less than two years later, the company announced it was splitting into a consumer audio and a consumer healthcare company. It appears much like the two companies did before the acquisition. The announcement included the typical “maximizing shareholder value” language. We sold a few weeks after the acquisition announcement was made, viewing it as a method of destroying a perfectly wonderful small-cap, wide-moat company. We’re very happy we did.
Whenever you hear management announce an M&A deal that promises to transform the business or achieve significant cost savings through synergies, consider carefully whether you want to partner with that management. Ultimately, they are likely to change the company, though not in the way they envisioned. As Mr. Damodaran mentioned, this kind of addiction can be very costly for the company’s and acquisition’s employees, their management, and most importantly, their shareholders.
Disclosure: Nintai Investments does not own any shares in the companies mentioned in this article and does not intend to purchase them in the next 60 days since publication.
[1] “The Morning After: Driving for Post-Deal Success,” KPMG Transaction Services, 2024
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