Mergers often enhance shareholder value, but these proved to be real stinkers...
Billionaire investment guru Warren Buffett once wryly remarked,
"When a chief executive officer is encouraged by his advisers to make deals, he responds much as would a teenage boy who is encouraged by his father to have a normal sex life. It's not a push he needs."
The urge to merge
Of course, CEOs have big egos and nothing boosts their self-esteem (and personal wealth) quite so much as a huge (and, ideally, transformational) deal.
While CEOs claim that it's cheaper to buy than to build, mergers and acquisitions frequently have a destructive effect. Indeed, they can easily turn two plus two into something considerably less than four.
For instance, a recent survey by KPMG showed that a third of deals boost the buyer's share price, a third do nothing to it, and a third reduce the buyer's share price. Thus, two-thirds of M&A deals spell bad news for the buyer's shareholders.
On the other hand, the latest research by consultancy Towers Watson and the Cass Business School found that listed companies making big acquisitions sharply outperform their peers over the following quarter. Towers Watson found 'a sustained outperformance for acquirers over the last three years of the research'.
However, this may prove to be a short-term quirk, fuelled by bargain-basement prices during the global financial crash.
Terrible tie-ups
I'm something of an M&A (mergers and acquisitions) sceptic, even going so far as to make an anti-M&A speech at a City function in 2004. At this conference, I argued that these deals were good for City professionals, but bad for shareholders as a whole.
In my experience, the seller's shareholders often profit at the expense of the buyer's shareholders, known as 'the buyer's curse'. Also, M&A activity provides fat fees to City folk, and higher remuneration for board directors, yet acquisition sprees frequently disappoint companies' owners -- their shareholders.
Personally, I'm much more in favour of smaller, bolt-on acquisitions than high-risk mega-mergers. Too often, operational problems undermine the rationale for doing such deals.
Here are four examples of big deals gone bad -- Mr Market's worst deals, if you like:
1. Vodafone/Mannesmann
For sheer destruction of shareholder value, Vodafone's (LSE: VOD) takeover of German rival Mannesmann immediately springs to mind.
In February 2000, just before the tech bubble burst, the agreed merger of Vodafone AirTouch and Mannesmann created a telecoms giant. The £112 billion all-share deal to acquire Mannesmann turned the merged group into the world's fourth-largest company, worth £224 billion.
Today, 11 years after the dotcom bubble burst, Vodafone is the UK's third-largest company, with a market capitalisation of £87 billion. So, Vodafone is worth £137 billion (61%) less today than it was before this titanic deal went through. Oops.
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2. AOL Time Warner
In another example of disastrous, top-of-the-market folly, US media giant Time Warner announced in January 2000 that it was to team up with Internet giant AOL (America Online).
Hailed as a visionary 'deal of the century', the merger completed a year later, with AOL paying $164 billion (then £84 billion) in shares for Time Warner, with the new entity split 55%/45% in favour of AOL.
AOL and Time Warner parted company in December 2009, after almost nine years of nightmares. In less than a decade, the tie-up had destroyed close to $200 billion of shareholder wealth.
Today, AOL Time Warner is seen as the poster child for the dotcom madness, and is used by business schools to show how not to do a deal.
3. Glaxo Wellcome/SmithKline Beecham
In December 2000, two of the UK's largest pharmaceutical companies, Glaxo Wellcome and SmithKline Beecham came together to form global giant GlaxoSmithKline (LSE: GSK).
At that time, GSK's share price was close to £21, valuing the firm at close to £110 billion and putting it in the top three of the FTSE 100. Today, almost 10½ years on, GSK's share price is around £13, or 38% lower than at the time of the merger.
Thus, the GW/SKB tie-up has destroyed roughly £40 billion of shareholder wealth.
4. Prudential/AIA
Lastly, I offer a failed deal -- one that failed to complete, yet still caused major headaches for the putative buyer.
In March 2010, UK insurance giant Prudential (LSE: PRU) launched a breath-taking $35.5 billion bid for AIA, the Asian arm of bailed-out US insurer AIG.
Following regulatory concerns and shareholder revolt, Pru abandoned this deal three months later, having failed to cut the asking price by $5 billion. This left Pru with deal costs nearing £1 billion and CEO Tidjane Thiam with egg all over his face.
What do you think was the worst deal in history? Please tell us in the comments box below!
More from Cliff D'Arcy:
> Cliff and The Motley Fool own shares in GSK.
