Mega-merger boom threatens a shareholder bloodbath

Teladoc Health

17/01/2025 12:00

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By Liam Proud
       LONDON, Jan 17 (Reuters Breakingviews) - When a chief
executive unveils a big merger, the fretting begins. Concerns
about a repeat of disasters like AOL-Time Warner or
Bayer-Monsanto immediately spring to mind. It’s a particular
concern for 2025 as steadier interest rates and laxer antitrust
enforcement augur a resurgence of chunky M&A. When acquisitions
reach $10 billion or more, however, the worst fears of
shareholders are often confirmed, with a handful of instructive
exceptions.
    There was some $660 billion of mega-deals last year
according to LSEG, a small uptick from 2023 but far short of the
more than $1 trillion in 2019 and 2015. Over the past five
years, whoppers have accounted for about a fifth of total deal
activity, down from the 27% over the previous half-decade.
Blue-chip bosses probably will take advantage of the improving
conditions to catch up.
    Central banks in the United States and Europe are slashing
borrowing costs, which should help debt-funded dealmaking. And
buoyant markets will further encourage corporate bosses and
their boards. The S&P 500 Index  .SPX  and MSCI All-Country
World Index are up 25% and 18%, respectively, from 12 months
ago.
    Competition authorities also seem poised to ease up on their
recent aggression. U.S. President-elect Donald Trump’s nominee
to run the Federal Trade Commission, Andrew Ferguson, has
promised to end outgoing Chair Lina Khan’s “war on mergers,”
according to Punchbowl News. The changing approach might give
the green light to deep-pocketed deal-makers such as Exxon Mobil
 XOM.N , Comcast  CMCSA.O  and Google parent Alphabet  GOOGL.O .
In Brussels, new anti-monopoly czar Teresa Ribera wants the
European Union’s rules to “evolve” so that companies can bulk
up. It’s no wonder investment bankers anticipate a busy year.
    There’s less for shareholders to cheer, however, based on a
Breakingviews analysis of 60 transactions since 2020 where both
the acquirer and target were publicly listed and the deal was
worth at least $10 billion, including debt. The sample starts
with payments processor Worldline’s  WLN.PA  $10 billion
acquisition of French peer Ingenico five years ago and ends with
the $23 billion takeover of Marathon Oil by ConocoPhillips
 COP.N  announced last May. In each case, the buyer’s total
shareholder return, including reinvested dividends, was measured
from the day before the deal’s disclosure and compared to the
equivalent performance of a relevant industry index over the
same period.
    The results are dispiriting. Three-quarters of buyers
trailed their sector benchmark. The median acquirer lagged its
industry index by 5 percentage points, in annualized total
return terms, while the mean underperformance was 7 percentage
points, dragged down by conspicuous flops like Teladoc Health’s
 TDOC.N  $18.5 billion 2020 purchase of Livongo Health and the
2021 union of Discovery and Warner Media. The entertainment
conglomerate has delivered a minus 30% annualized return since
the last trading day before announcing their merger, compared
with minus 13% for LSEG’s United States Broadcasting Total
Return Index  .TRXFLDUSTBCST , implying a 17 percentage point
drag in annual terms.
    By industry, CEOs in financial services and healthcare are
particularly bad at mega-deals, with buyers on average trailing
their relevant benchmarks by 9 percentage points and 10
percentage points, respectively, in annualized terms. Some of
the medical misses, which includes pharmaceuticals, seem to be
cautionary tales in overpaying. Pfizer’s  PFE.N  $43 billion
Seagen acquisition, for example, looked expensive when agreed in
early 2023, and its stock has subsequently lagged the S&P 500
Pharmaceuticals and Biotechnology Index by roughly 20 percentage
points, according to annualized LSEG data. The $150 billion
drugmaker recently attracted the attention of pushy investor
Starboard Value, whose gripes include boss Albert Bourla’s M&A
track record.
    The insipid stock-market reception to banking M&A also
offers pause for thought. Neither Royal Bank of Canada’s
 RY.TO $10 billion purchase of HSBC Canada in 2022, nor National
Commercial Bank’s $15 billion deal with Saudi peer Samba
Financial, set the world alight. Both acquirers have fallen
short of their listed regional peers. It’s a bad omen for
Italy’s $70 billion UniCredit  CRDI.MI  as CEO Andrea
Orcel mulls bids for rivals Commerzbank  CBKG.DE  and Banco BPM
 BAMI.MI . There are many ways to go wrong in financial services
mergers, so the absence of an obvious boost in stock prices
raises doubts about the risks involved.
    Energy investors at least have seen buyers on average
perform only slightly worse than their benchmark, helped by
Chesapeake Energy’s move on Southwestern Energy a year ago to
form Expand Energy  EXE.O . It’s early days, but the combined
company’s shares have trounced those of peers so far. The value
of the targeted cost savings more than justified the premium
boss Nick Dell’Osso paid, Breakingviews calculated at the time.
Diamondback Energy’s  FANG.O  $26 billion purchase of Endeavor
Energy Resources also has fared well by return standards.
    Those exceptions, however, speak to the rarity of gigantic
deals. They involved hefty synergies and stock-based components,
meaning both sets of owners shared in the benefits. The dynamic
tends to make price negotiations less contentious. Just as
importantly, the target business models are similar to those of
the new owners, meaning fund managers are essentially getting
more of what they already want.
    Precious few CEOs are blessed with slightly smaller versions
of their own large outfits that also provide low-risk cost
savings and are willing to swap shares. It’s one reason why so
many of them get creative with their deal structures and
overestimate the value they can create. By all means, let the
buyer beware, but also be sure to beware the buyers.

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    CONTEXT NEWS
    Companies announced $656 billion of deals worth at least $10
billion in 2024, according to LSEG data, slightly more than
during the previous year but less than in 2021, 2019 and 2015
when the tally exceeded $1 trillion.

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Mega-deals have shrunk as a percentage of M&A    https://reut.rs/4akUoZU
Performance of giant mergers by industry    https://reut.rs/42fhsY4
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Editing by Jeffrey Goldfarb and Pranav Kiran)
 ((For previous columns by the author, Reuters customers can
click on  PROUD/ 
liam.proud@thomsonreuters.com))