Merger madness rarely pays off, so why do firms still make these deals?

cepheus

It seems to me company value is parasitised off by a mixture of executives, middlemen and traders, whilst employees, consumers, and in the case of the potential Pfizer AstraZeneca deal, the country as a whole will get ripped off.

While CEOs might get a handsome bonus and shareholders receive an appealing bump in share price, there are losers too. Studies repeatedly find that 70% to 90% of mergers fail. Mergers need to be paid for by cost cutting, which often makes job losses inevitable. Customers, local communities and national governments can lose out from M&As. The Pfizer deal, for instance, could mean AstraZeneca’s innovative cancer drugs get lost in development, and never make it to market.

Sometimes the whole economy loses. Consider the M&As behind recent bank failures: Co-op overreached by taking over Britannia; RBS bought subsidiaries around the world; Halifax and Bank of Scotland became HBOS, which fell victim to the financial crisis; HBOS was bailed out by Lloyds which then in turn ran into difficulties.

But the most surprising downside is that the very people who are supposed to be the main winners – the shareholders – actually end up losing out. A review of more than 130 studies found that, while on balance M&As created some value for the company selling the assets as well as shareholders, they made no difference to the value of the acquiring company. In other words, acquiring companies often go through painful and expensive processes for absolutely no pay-off.

So why do senior executives seem so attached to M&A? Perhaps the most obvious reason is that while long-term benefits are highly uncertain, short-term share price benefits can be significant. Even the announcement drives up share prices, sometimes to unwarranted levels. AstraZeneca shares rise with every positive buy-out news story, and analysts now believe they could fall 21% if Pfizer pulled out of the deal.

This can richly reward activist shareholders and hedge funds who typically buy and hold shares to take advantage of such fluctuations. Gaining control of a company, pushing up its price and then selling it on is a lucrative business to be in. Just ask Carl Icahn.

However, for those shareholders who are in it for the medium or longer term, the value is very uncertain. And these are the exact owners companies need – patient shareholders willing to sacrifice making a quick buck for an investment in long-term growth.

Of course, there is another group who make handsome profits from M&As: the so called “market intermediaries”, including investment bankers, lawyers, consultants, coaches, branding and design agencies, and so on. The core business of many of these advisers is to identify, promote and execute mergers or acquisitions. They don’t see mergers as a means to deliver better results for a given company; for such intermediaries, the deal is an end in itself.

https://theconversation.com/merger-madness-rarely-pays-off-so-why-do-firms-still-make-these-deals-26130

Seabee42

Sadly it is a way of buying growth, the sum of the parts is smaller but the buyer is bigger. Not growing a company is seen as bad for whatever reason.

ruggedtoast

The purpose of companies like AstraZeneca is to make money for their shareholders, not to fulfill any strategic interest the UK might have.

The only industry the government cares about is banking, which does well in these deals, and it isnt just the Tories. Gordon Brown helped to broker the Cadburys's takeover and asset stripping by Kraft because RBS funded the loan that probably no other bank would have. Who else would have offered a tottering unprofitable zombie corporation like Kraft a massive loan other than a tottering bankrupt state bank?

AZ is going dont worry about that, and the champagne corks will be popping in Number 10 when it does.

Generali

cepheus wrote: »

It seems to me company value is parasitised off by a mixture of executives, middlemen and traders, whilst employees, consumers, and in the case of the potential Pfizer AstraZeneca deal, the country as a whole will get ripped off.

It's generally bad for shareholders in the buying company as they usually overpay.

It's good for shareholders in the selling company as they get overpaid for their shares.

It's great for senior managers of the new, larger company as managers get paid vs turnover rather than profit margins as a rule.

cepheus

I suppose the way to look at this is that the non-producers, the market intermediaries and shareholders have to be paid, and they will be taking a fair bite out of the apple leaving less for everyone else. So unless there is a significant overall strategic gain from the merger, it's bad news for your average Joe who will have few or no shares in his pension or otherwise to make up for it.

Generali

cepheus wrote: »

I suppose the way to look at this is that the non-producers, the market intermediaries and shareholders have to be paid, and they will be taking a fair bite out of the apple leaving less for everyone else. So unless there is a significant overall strategic gain from the merger, it's bad news for your average Joe who will have few or no shares in his pension or otherwise to make up for it.

Not really.

It's bad news for the buying company's shareholders. It has little impact on consumers as the company still operates in much the same competitive environment as it did previously.

princeofpounds

and in the case of the potential Pfizer AstraZeneca deal, the country as a whole will get ripped off.

The country doesn't own AstraZeneca.

Eric_the_half_a_bee

You are the chief executive of a £300m company. One morning, you look in the mirror and think, wouldn't it be better to be the chief executive of a £500m company?

Not a lot more to it than that

Generali

Eric_the_half_a_bee wrote: »

You are the chief executive of a £300m company. One morning, you look in the mirror and think, wouldn't it be better to be the chief executive of a £500m company?

Not a lot more to it than that

I agree although you should add a few 0s on your numbers.

shortchanged_2

Well it's one way of getting rid of the competition.

Who's next? GlaxoSmithKline?

wotsthat

Generali wrote: »

It's good for shareholders in the selling company as they get overpaid for their shares.

I hope that's true - I sold up!