Where Have the Strategic Bidders Gone??
April 13th, 2011Interesting article in the New York Times about the dearth of strategic buyers in the M&A market (see Battling Headwinds).
It’s true that some blockbuster strategic deals have been announced recently, including AT&T’s $39 billion proposed acquisition of T-Mobile from Deutsche Telekom and Nasdaq’s $11.3 billion unsolicited bid for NYSE Euronext.
But these deals belie a strange fact: strategic bidders, or bidders that are operating companies, appear hesitant to re-enter the takeover market.
The article highlights some recent deals in which strategic bidders were conspicuously absent, and then attempts to explain the increasing reticence of strategic acquirers to participate in the M&A market as due to a changing mindset among executives.
Private equity firms have historically been at a disadvantage on how much they can offer. Strategic bidders can often realize greater cost savings and synergies by eliminating duplicative functions and combining and operating the acquired company more efficiently within their other operations.
This advantage was partly eclipsed in the cheap-money years before the financial crisis. But we are supposed to be back in more normal times, so why are strategic buyers hanging back?
The apparent reluctance may be the result of a fundamental reassessment of the value of takeovers, one that was occurring even before the financial crisis. Since then, chief executives and boards have been more concerned with running their businesses and surviving than with chasing expansion through takeovers. This is particularly true when the chance of success is far less certain, as in hostile takeover attempts.
The last 15 years have produced mergers that proved to be spectacular failures. AOL’s merger with Time Warner and Daimler’s acquisition of Chrysler are among the most notable. Together, these deals destroyed more than $150 billion in shareholder value.
During this time, studies have shown that while there are gains to be made, many M&A deals prove unsatisfactory for buyers. McKinsey & Company estimates that only a third of merger deals create value. In a separate study, Prof. Robert F. Bruner, dean of the Darden School of Business at the University of Virginia, found that almost half of deals failed, although these results were skewed by some spectacular miscues.
These studies illustrate that achieving a successful merger is hard work, requiring strategic vision and a focus on integrating the acquired company.
Although that’s a compelling explanation, I’m not sure I’m buying it.
Over the last 50 years or so, it’s been well documented that the overwhelming majority of strategic acquisitions fail to create value for shareholders (see also More Deals Gone Bad, Great Shareholder Ripoff, Why M&A Deals Go Bad, Dumbfounded by the Data, and The Complexity of Strategic Acquisitions). And despite the fact that we’ve known for about half a century that most acquisitions fail, deals consummated over the past 10-20 years haven’t performed appreciably better than those consummated in the 30 years prior (see Are You Paying Too Much for That Acquisition? and The Synergy Trap).
In short, there’s scant evidence that we’ve learned from past M&A mistakes. So what makes us think that anything has changed now?
For this reason, I’m less inclined to believe that the explanation for the dearth of strategic acquirers is that we have finally learned our lesson (…sounds reminiscent of the “This time it’s different” meme). Rather, the reason for the dearth of strategic acquirers (to the extent that there is one) likely has more to do with the residual effects of the financial crisis — an increased focus on core businesses, operating in capital preservation mode, a reticence to take on debt, and/or the lack of adequate capital — than any fundamental change in the mindset of executives towards M&A deals.
Sphere: Related Content
July 19th, 2011 at 3:37 pm
[...] time, the evidence suggests that acquisitions generally fail to create value for shareholders (see Where Have the Strategic Bidders Gone?, More Deals Gone Bad, Great Shareholder Ripoff, Why M&A Deals Go Bad, Dumbfounded by the Data, [...]