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AGL and Vocus walk into a bar…

I’m not a cynic, by nature.

Yes, I’m paid to be sceptical, but cynicism is usually a handicap as an investor.

Plus, I’m naturally an optimist, as you’ll know if you’ve read a few of these emails.

But every now and then, a piece of corporate news really sits me on my backside.

At best, you’d describe it as daring, ambitious and visionary.

At worst, to steal a line from famed US fund manager Peter Lynch, this is di-worsification of the very, well, worst kind.

I refer, of course, to the mooted takeover of struggling telecommunications outfit Vocus by…

… wait for it …

AGL.

No, not some similarly named private equity outfit or European telco outfit; our AGL.

The energy producer and retailer.

Yes, that AGL.

It’s lobbed a conditional $3 billion bid for Vocus, after three previous would-be buyers walked away.

I’m shaking my head, even as I write this.

Could AGL pull it off? I guess so. 

But it would be right up there with Lazarus for miracles.

Think about it for a second: it’s the equivalent of Telstra lobbing a bid for, say, Origin Energy.

Or Transurban buying Optus.

Now, let’s be fair.

Join me in an experiment. First, step back ten paces. Then squint really hard, while thinking positive thoughts.

Didn’t work?

Me neither.

Still feels like a Hail Mary like we haven’t seen since Labor reinstated Kevin Rudd in 2013.

I guess, given the polls, Rudd was worth trying.

Which means, if you’ll follow my analogy… that AGL must consider itself as likely to succeed as Julia Gillard was to be reelected.

Because that’s the thing. While everyone is focussing on whether or not AGL could make the acquisition work, it’s worth looking at it from the other angle.

Without putting too fine a point on it, how much trouble must AGL be in, when it thinks shelling out $3 billion for Vocus is the best use of shareholder funds?

Imagine the conversation at the board table. 

“Anyone got any good ideas?”

Silence

“Anyone got any okay ideas?”

Silence

“Anyone got any crazy ideas?”

Silence…. And then…

“We could always buy Vocus?”

I assume they decided that taking it to the casino and putting it all on red was too ostentatious.

Remember, three other potential buyers have already had a look, and walked away.

Again, I ask, “How few growth options must be left, when this is the best one available”?

Because, that’s the problem.

The market hates the deal, judging by yesterday’s 7% sell-off in the wake of the news.

But the inference is also clear: If the deal doesn’t go ahead, what does that say about the company, as it is?

Maybe nothing. It might fail to buy Vocus, but still go on to great things. In which case, why is it taking this risk?

It’s hard to escape the conclusion that, whatever the merits of the purchase, AGL is a company otherwise lacking opportunities for growth.

It seems that AGL is damned if it does, and damned if it doesn’t… but damned either way.

Of course, it could succeed. But what are the odds? What’s the payoff?

Investors — professional and amateur alike — can often feel that they need to have a view. To have conviction on everything.

Such a view is flawed, of course.

If I’m wrong on AGL? No skin off my nose. 

Better to, in this case at least, run the risk of missing out on the upside, rather than swinging at every pitch and striking out — especially when the payoff for success is so uncertain.

To use a baseball term, as Warren Buffett says, there are no ‘called strikes’ in investing.

Let’s make it a little more cricket-friendly: In investing, you can’t get out bowled or LBW — only by hitting a catch to a fielder. Which means you can wait for the half-tracker or the one that’s full and wide, while the on-side is stacked.

Or, like AGL, you can lash out at some Glenn McGrath quality line and length and try your luck.

Maybe you’ll hit him back over his head.

Maybe.

Fool on!

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Motley Fool contributor Scott Phillips has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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