Reuters Insider - Breakingviews: M&A party poopers
03/12/2015 17:35
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Description: Dec 3 - Despite deal volume surpassing $4.2 trln,
one huge merger and one far smaller one offer
telltale signs of a cycle past its peak. Rob Cox
and Jeffrey Goldfarb play the parts of buzzkills.
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Short Link: http://reut.rs/1RkcnSN
Transcript (May be auto-generated)
The giant buck in now that is corporate mergers and acquisitions just hit a new
record, hitting over $4.2 trillion - a level never seen before. There are signs
that maybe the party will be coming to an end at some point soon. Rob, you've
spotted a couple of indicators. Sure. As you have written in the past and we
both have this M&A boom, is showing a few signs of coming to an end. One of them
is I mean, even though we're reaching a record level, it's the sort of quality
of the deal. So if you look at some of them, the big one of course was the $160
billion Allergan-Pfizer deal, mostly predicated on tax savings. So, the point
is, it's not really the industrial logic isn't there as much as the financial
logic, that financial logic could be swept away at any time that the United
States- That is the scale of this thing really. And it's the scale of it, a $160
billion but you know, so that's - we've had inversions but this is like, the
mother of all inversions, right. So if you were to take and add up the 10
previous biggest inversions in the healthcare sector, over the two or three
years that we've seen these, they wouldn't even amount to the whole $160
billion. But you're also seeing some signs of deals that are predicated on
not-so-intelligent logic. We're hearing a new word called adjacencies.
Yeah, people are, bankers are rolling out adjacencies as this article - So what
does that mean exactly? Well, in theory, it means, "Okay, I'm Nike and I make
sneakers but I also make apparel." That's an adjacent line. However, when you
start to go beyond those lines, so you decide - I always use Nike to decide to
buy a hockey equipment company called Bauer - didn't really work out. That was
an adjacency too far. What you're seeing are examples like, I think, the sort of
classic example of it was this company called Urban Outfitters - a specialty
retailer goes out and buys -
A pizza chain? A pizza chain because - Very natural. Because who doesn't want
pizza and mozzarella when they're shopping for denim? So that's one of these
like, "What's going on here?" And we've also seen with Pandora which - Pandora
bought radio assets and it's bought a ticketing service. Again, it's an
adjacency. And they call it adjacency because, "Hey, you like music, you listen
to music, well, we can also sell you tickets to go see your favorite-" Well, not
exactly the core competence. Now, you go back to previous eras, previous booms,
and you think about adjacency M&A - it often was a sign that we reached a peak
so, in the 2007 boom which was mostly characterized by LBOs but you had things
like Nokia buying NAVTEQ, you know, mapping software, they bought it for $8
billion in the middle of the biggest part of the boom, they sold it for $3
billion. Right. They took a $5 billion loss, we saw it.
And we've already seen a full cycle within this cycle which was ConAgra, right?
ConAgra is a great example and Ralcorp. They bought it sort of previous to the
cycle but then, part of the cycle, new CEO, they got rid of it and that was
like, they were a consumer-branded goods company, you know, cereal, and stuff
like that. And they bought a company that was doing white label. Right. It's
not, which isn't that different to say than I don't know, Daimler buying
Chrysler. Daimler is a luxury goods but - Cars? Cars but it's a total different
segment of the market. It buys Chrysler in the boom of the late 1990s, gets rid
of it a few years later. All right. So we'll keep an eye on both those signs and
we'll be back with more Breakingviews soon