Mergers and acquisitions used to be simple. Spot a company, line up a debt package and a few regulatory approvals, and wait for the bonus money to roll in.
Nowadays, M&A bankers are behaving more like DJs: Digging through boxes of assets looking for businesses that go well together, discarding the bits they don't want, and remixing entire industries in the hope that new mashups will please investors.
A few years ago, Dow Chemical would either have bought DuPont, or decided the regulatory hurdles were too high and given up. Now, the two storied businesses are to combine and then split apart again into two or three companies, people with knowledge of the matter told Bloomberg News. The Wall Street Journal reported the plan earlier today.
It's not hard to see the advantages of such a marriage. With Dow and DuPont previously discussing deals for their farm-related businesses and Syngenta receiving successive bids from Monsanto and ChemChina, these are fertile times for agricultural M&A. Bringing together Dow and DuPont's agritech units immediately creates a bigger player in the market than Monsanto, according to data compiled by Bloomberg based on trailing 12-month revenue:
The leftovers look pretty appetizing, too. Twinning Dow's plastics business with the polymers units, which both companies classify as "performance materials," results in a $38 billion company. The assortment of businesses that would remain after that had been carved out still pulled in about $24 billion of revenue over the past 12 months.
Such a deal would cap a banner year for big takeovers. Deals valued at more than $10 billion in North America, Europe, and developed Asian countries will tip above the $2 trillion total in 2015 if the Dow-DuPont combination goes ahead, according to data compiled by Bloomberg that includes terminated and proposed takeovers. Based on the 0.5 percent that investment bankers can hope to take home for advising on major deals, that comes to about $10 billion in fees -- almost enough to pay off all those fines for exchange-rate manipulation.
The build-and-break model being studied by the two companies is also growing more popular. General Electric spent $10 billion buying Alstom's gas-turbine business at the same time as spinning off its financial unit, GE Capital, and trying in vain to sell its home-appliances division to Electrolux. Lockheed Martin said in July that it would buy the helicopter-maker Sikorsky from United Technologies and would then consider spinning off or selling its own information-systems unit. And don't forget Allergan, which will look at dividing into one business for new drugs and another for older, less profitable medications following its record takeover of Pfizer. (Pfizer is the true buyer here, but the transaction was structured with Allergan as the acquirer for tax reasons.)
A certain amount of fission is inevitable in a market where so much is going on. Many of the companies with the scale and access to capital for such mega-deals are already so dominant that regulators won't let a transaction through without significant spinoffs. Given that climate, and the appetite of investors -- particularly the annoying activists who've been buzzing round Dow and DuPont -- for more focused businesses, why not make a virtue of necessity and go down the remix route?
There are important critics of the approach. "Our companies are worth more as part of Berkshire than as separate entities," Warren Buffett wrote in Berkshire Hathaway's 2014 annual report. That's not just the Sage talking his book: The idea that diversified firms suffer a "conglomerate discount" and would be worth more split into separate businesses has been increasingly questioned by economists. During the 2008 financial crisis, conglomerates were able to offset the freezing-up of capital markets by transferring cash to needy businesses from other parts of the group, according to a 2011 study by academics at the University of Chicago's Booth School.
With interest rates set to rise for the first time in nine years and uncertainty about the direction of China's economy driving commodities into a deep funk, all this dealmaking can't help but have a certain last-hurrah feel to it. During the 2008 financial crisis, companies rued their failure to pay down debt before the storm hit. During the next one, will they lament ignoring the benefits of diversification?
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
(Corrects data on Syngenta revenue in "Plant Hybrid" chart.)
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