More than half of the 100 biggest takeovers made during the last mergers-and-acquisitions boom have something in common: By one measure, they never should have happened.
The stocks of 53 companies that made the biggest purchases from 2005 to 2008 lagged behind industry peers two years later, according to data compiled by Bloomberg’s ranking group. Among the worst performers were McClatchy Co., Boston Scientific Corp., and Sprint Nextel Corp., all three of which are now valued at less than the price they paid for their acquisitions.
Companies struck $10 trillion of deals during the last merger binge, even after more than a decade of research showing deals often don’t pay off for the buyers. The average stock price of all the top acquirers trailed benchmark indexes by an average of about 3 percentage points.
“As a CEO, you are forced to think about growth, think about outperforming others, building the biggest and most dominant corporation in your sector, and you will do deals,” said Alexander Roos, a partner at Boston Consulting Group. “Everyone is always very convinced of being the first to know how to do it right.”
Worse at Peak
Deals executed during a financial boom tend to turn out worse than those done in a slump, according to research by Roos. Even so, a lack of access to cash and credit can lead companies to shelve purchases at the most opportune time. The global economic slowdown that began at the end of 2007 coincided with a collapse in the M&A market, with annual takeover volume falling by more than half from the peak, to $1.8 trillion last year.
“If you can get things at low prices, you’re going to make money,” said Donna Hitscherich, a senior lecturer in finance at Columbia University and a former M&A banker. “But you have to have the courage of your convictions.”
Warren Buffett had one of the top-performing deals in the Bloomberg ranking after his Berkshire Hathaway Inc. bought PacifiCorp for $5.1 billion in 2006. Berkshire’s stock outperformed a benchmark index by 35 percentage points, making PacifiCorp the ninth-best deal in the ranking.
That doesn’t mean the billionaire investor hasn’t had deals turn sour. In 2008, Buffett applied the lyrics of a country music song by Bobby Bare to missteps in M&A: “I’ve never gone to bed with an ugly woman, but I’ve sure woke up with a few.”
Suez SA, the best-performing acquirer in Bloomberg’s ranking, was boosted when it also became a takeover target. Paris-based Suez purchased shares in Belgium’s Electrabel SA that it didn’t already own for about 12.6 billion euros ($16.2 billion). Suez was itself later bought by Gaz de France SA, helping the shares beat a benchmark index by 83 percentage points.
McClatchy’s purchase of the Knight Ridder Inc. newspaper chain, for $4.1 billion in 2006, ranked the worst of the 100 on Bloomberg’s list, with McClatchy shares underperforming the Bloomberg Advertising Age AdMarket 50 Index by 93 percentage points. Sacramento, California-based McClatchy borrowed cash to buy the chain as newspaper real-estate advertising plunged. Elaine Lintecum, McClatchy’s treasurer, declined to comment.
Boston Scientific outbid Johnson & Johnson to buy Guidant Corp. for $27.5 billion in 2006. The takeover diversified Boston Scientific’s product line while leaving it to deal with tens of thousands of safety recalls linked to Guidant defibrillators. The stock traded 64 percentage points below the Standard & Poor’s 500 Health Care Equipment Index two years after the purchase. Paul Donovan, a spokesman for Boston Scientific, declined to comment.
Sprint’s $36 billion combination with Nextel in 2005 led hundreds of thousands of customers to defect to competitors and pushed the stock 47 percentage points lower than industry peers. The company is now valued at about $30 billion including debt.
Sprint has made “great strides” in the past 2 1/2 years in improving its customer experience, strengthening its brand and generating cash, said Scott Sloat, a spokesman for the Overland Park, Kansas-based company, in an e-mail. The combination with Nextel also allowed Sprint to bring the first fourth-generation mobile-broadband network to customers, he said.
Shareholders of buyers may be growing less tolerant. The biggest transaction announced this year, Prudential Plc’s $35.5 billion offer for an Asian insurance unit owned by American International Group Inc., fell apart when Prudential’s investors refused to support it, calling the price too rich.
Among smaller purchases, stockholders of Charles River Laboratories International Inc. last month scuttled a planned $1.6 billion acquisition of WuXi PharmaTech (Cayman) Inc.
During the past decade, large institutional investors have grown more willing to speak out against an acquisition, a strategy the activist hedge funds pioneered, said Christopher Young, head of takeover defense at Credit Suisse Group AG.
That “rambunctiousness,” Young said, has only grown since the depths of the financial crisis in 2008. “Shareholders are saying capital is a scarce asset, you should use it wisely.”