Good morning. This is Anne VanderMey, filling in for Erin today. Send your feedback to firstname.lastname@example.org, or find me on Twitter @vandermy.
AMAZON BUYS WHOLE FOODS: The e-commerce titan this morning said it would acquire Whole Foods in an all-cash deal for $13.7 billion. The move comes as Amazon gets serious about its grocery business, and Whole Foods faces pressure from activist investors.
Some initial takeaways:
• This is by far the Amazon’s largest acquisition ever, leaving its $1.2 billion deal for Zappos in the dust.
• The specialty grocer has been working with Instacart for delivery. This can’t bode well for that partnership.
• Whole Foods has come under fire for years because of the tension between its feel-good mission around health and the environment, and its role as a huge business. (Remember asparagus water?) Fortune’s Beth Kowitt talked to John Mackey in 2015 about some of the company’s past scandals:
“This stuff goes viral,” Mackey tells me, “because people are eager to believe bad things about Whole Foods so it doesn’t disrupt their mental model” of business as selfish and greedy. It’s similar to how people scrutinize his diet. “They want to catch me on stuff,” says Mackey, who is a vegan and abstains from processed food. “They want to prove I’m a hypocrite. I think that’s true for Whole Foods as a whole.”
It will be interesting to see how consumers react when the chain is owned by an even bigger company —with a CEO who eats meat.
MEANWHILE, Walmart, which is in a race to to prevent Amazon from disrupting its entire business, responded with its own M&A deal: a $310 million acquisition of high end apparel startup Bonobos. As some critics pointed out on Twitter, one of these companies is playing chess and one of them is playing checkers. Investors agree: Retail stocks took a dive this morning.
CONGLOMERATES’ NEW CHAPTER: Investors are praying that GE’s new CEO, John Flannery, will start selling off more pieces of his $127 billion company.
The big piece of CEO news from earlier this week—besides the ascension of Uber’s new ruling committee—was the appointment of longtime GE veteran John Flannery to the company’s top spot. He’ll have a tough job.
Aside from Jack Welch’s standout tenure at GE, the 125-year-old company has had a long and storied history of underperforming the market. Fortune’s data guru Scott DeCarlo ran the numbers on the last few CEOs at the company: In the 1970s, under Welch’s predecessor, Reginald H. Jones, GE stock underperformed the S&P 500 by about 30 percentage points. Welch outperformed the market by about 2000 percentage points between 1981 and 2001. And Immelt underperformed by about 150 percentage points.
All that is to say, running a conglomerate like GE is hard. Hulking, diversified corporations, once the height of fashion, are now decidedly out of style on Wall Street. The data bears out the sentiment: According to McKinsey research, between 2002 and 2010, conglomerates’ median total annual return to shareholders was 7.5%, vs. 11.8% for more focused companies.
Which is why investors in GE think (and fervently hope) that Flannery, with his finance and M&A-heavy background, is ready to make some big deals. The actual outcome could have big implications for the future, and possible further decline, of the American conglomerate.
ADDENDUM: I’d be remiss not to point out that plenty of people have compared modern tech companies’ sprawling portfolios of internet businesses with the early days of GE and its electricity businesses. We’ll check back to see how those tech giants are doing 125 years from now.
IT JUST TAKES ONE TRICK: Chinese web giant Tencent is said to be seeking to acquire Angry Birds maker Rovio Entertainment. According to reporting by the Information, Tencent is one of several companies to approach Rovio about a possible purchase,” and the deal could reach $3 billion. Rovio turned a 17.5 million euro profit last year on the strength of its Angry Bird franchise, though some investors have lamented that it relies too heavily on its malcontent fowl. Barron’s notes:
If you assumed Rovio was a one-trick pony, you’d be about right. Founded in 2003, the company’s roster is dominated by titles like ‘Angry Birds Space,’ ‘Angry Birds Star Wars,’ and ‘Angry Birds Transformers.’ Surely ‘Angry Birds: Clash of Clans’ is a shoe-in if this deal happens?
JAW BREAKERS: As Americans attempt to eat healthier and consume less sugar, Nestlé is considering unloading its iconic candy business, which could fetch some $3 billion, the Wall Street Journal reports. It would be the latest in a string of big food mergers that my colleague John Kell flagged in March. One food industry analyst summed up the prevailing sentiment:
“With revenue now in negative territory for a lot of these companies, the sense of urgency to do a deal is going to be higher,” says Credit Suisse analyst Robert Moskow.
• The U.S. acts to seize a Picasso given to Leonardo DiCaprio amid Malaysian fund intrigue.
• Facing billions in liabilities for airbag defects, Takata is facing bankruptcy.