Green light for takeovers
As corporate life starts to return to normality after the global financial crisis, companies are once again getting the go-ahead to target mergers and acquisitions.
If 2013 was the year the world learned to live with the aftershock of the financial crash, then 2014 will be remembered for the return of those other signs of normality in corporate life: mergers, acquisitions, corporate restructuring and contested takeovers. Expansionist executives, who have long been instructed by nervous boards to concentrate on getting their own business right, have been suddenly given the green light to pursue aggressive designs on others.
The signs of recovery mean that animal spirits are back in fashion, as are bids and deals.
In terms of statistics the results are jaw-dropping. The total worldwide value of takeovers in the first half of this year was $1.8 trillion – a full 73% higher than in the same period of 2013.1 Not since the recovery from the recession of the early 1990s has there been such a spurt in a single year; not for a decade has so much been spent on takeovers.
But the statistics for the volume of takeovers, rather than the value, tell a different story. While the total value of bids is almost as high as it has ever been, there is nothing like the same increase in the number of deals. What we have, in fact – and what you would expect in an age of globalisation where the world is coming to be dominated by a relatively small list of giant companies – are very big deals, but fewer of them.
While the US was leading the way in deal activity, first-half figures suggest that the rest of the world may be catching up, with European mergers and acquisitions doubling compared with the same period last year, and Asia-Pacific having its best six months since Thomson Reuters started collating the data in the region in 1980.
Much of the activity had been concentrated in just a few sectors: technology, media and telecoms. However, pharmaceuticals and healthcare – not counting Pfizer’s unsuccessful $100 billion tilt at AstraZeneca – have now taken the lead in terms of activity. Meanwhile, there has been little to no activity in mainstream sectors such as industrials, energy or consumer groups, and very little in finance, which is surprising given how many weakened businesses there are out there.
Even more striking is the change in mining, long the home of the mega takeover, where sentiment is actually going the other way. Industry giant BHP Billiton now plans to spin off a slice of its business so large that if it were to be listed in London it would be a FTSE 100 company. Its chief executive says he craves simplicity. He believes that the sheer complexity of these vast companies means they don’t do anything as well as they should.
But not many out there are listening to his words of caution. Bids are getting bigger because markets are global, they are back in fashion because confidence has returned and they can be financed because money is cheap and share prices high. Having managed their companies through hard times, executives are now looking for other ways to deliver growth. Consider also, a quirk in the country’s tax legislation makes it advantageous for US companies to relocate overseas if they also have a big non- American shareholder base. The simplest way to achieve this is to buy abroad. This drove Pfizer’s approach to AstraZeneca and was an underlying reason behind AbbVie’s $54 billion purchase of Shire Pharmaceuticals. You do have to ask, however, if all this activity actually delivers what is expected of it? The theory is clear enough – a management team who underperforms is bought out by a more skilled team that can use the assets better. Takeovers are capitalism’s way of dealing with bad management.
But the reality is rarely that simple. Often, it is the good businesses that get taken over, sometimes by a company that is less good but has deep pockets. Kraft’s purchase of Cadbury was arguably an example of this. Or sometimes the target company is not as good as expected, such as Hewlett-Packard’s purchase of Autonomy – a deal that has been mired in acrimony and lawsuits ever since. And while those who own shares in an acquired company normally get paid a premium to the recent market price, the shareholders of the acquiring company typically do less well. Between half and three quarters of bids are followed by a fall in the bidder’s share price1; if not immediately, then within a year to 18 months. And it is this that prompts some critics to say that at least half of takeovers fail.
There is no easy answer as to whether bids are good or bad, but an analysis by Deloitte a few years ago offers some interesting pointers. It suggested that geography, size and sector were key determinants of success or failure. Thus, a bid was most likely to deliver value for the buyer if the target company was close by, if it was much smaller than the company buying it and if it was in the same sector. The more these constraints were stretched, the more likely the takeover was to destroy value. Buying abroad, buying big, or buying a business where you have little industry knowledge all significantly increase the chance of failure.
1 Thomson Reuters Mergers & Acquisition Review, June 2014