Beware the Monster M&A Deals
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A flood of cheap money is financing the biggest boom in mega-mergers and takeovers since the 2008 global financial crisis.
But analysts warn that hastily arranged corporate marriages that seem blissful in good financial times can end in tears, and considerable debts.
Companies have already struck 45 mergers and acquisitions with a value exceeding 10 billion (9 billion euros) each in the first nine months of the year, according to data provider Dealogic.
The mergers amount to a total of 1.2 trillion — up 89 percent from the same period last year.
In the latest example, US pharmaceutical giant Pfizer, the Viagra maker, this week announced its intention to buy Allergan, which makes Botox, and has a market value of more than 110 billion.
In the 2000s, the AOL-Time Warner merger, which was agreed during the dot-com bubble but eventually unravelled, stands out as perhaps the worst merger in corporate history, in part because of a clash between the two companies’ cultures that was never successfully resolved.
But the availability of easy money is tempting to company chiefs who want to buy growth instead of generating it from their existing business, especially in a period of moderate economic growth.
Near-zero inflation can depress revenues, he added. “Large companies rely on acquisitions and geographic expansion to achieve growth.”
In the beer sector, Anheuser-Busch InBev, the giant behind top lager brands like Beck’s, Budweiser and Stella Artois, is seeking to swallow rival SABMiller in a deal worth more than 120 billion when debt is included.
One of the driving forces behind InBev’s bid is the chance to get access to some of the world’s fastest growing markets, including Africa where SABMiller has roots dating back to the Johannesburg gold rush of the late 19th century.
The wave of mergers is moving back towards advanced economies after a slowdown in emerging markets, said Herve Jauffret, an analyst at audit and services group Ernst and Young who has just completed a study of the trend.
“Investor appetite is coming back for the mature economies: the United States, Germany, England,” he said.
In France, the king of the merger is billionaire Patrick Drahi, founder of the telecommunications group Altice who has spent nearly 30 billion in a few months to acquire US cable operators Suddenlink in May and then Cablevision in September.
The financial climate can change quickly, too, between the time when a corporate engagement is announced and the actual wedding date.
Royal Dutch Shell announced in April its intention to buy Britain’s BG Group for the equivalent of 64 billion euros.
But in the light of low crude oil prices, some investors are now casting doubt over the deal.
Despite the risks, big mergers appear to be back for a while.
It forecasts the number of such deals will grow eight percent this year to regain the pre-financial crisis levels of 2007.
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