M&A volume in 2015 was one for the record books, but the official record on many of the biggest deals has yet to be written.
There were at least eight $50 billion-plus transactions struck in 2015, more than in any other year. (The previous high, set in 1998, featured the merger of energy giants Exxon and Mobil as well as BP and Amoco.)
The list of broken records this year is long and varied -- biggest tech deal, biggest drug deal, biggest beer deal -- but the reasoning behind them was often the same. Companies battling sputtering growth looked for other ways to expand, while low interest rates and high stock valuations made it easier to finance large purchases.
Big deals mean more is at stake, though. These gigantic transactions often don't turn out as planned or deliver as promised. Below is a look at the top five deals of the year by size, and our verdict on each.
1. Pfizer-Allergan: The $160 billion valuation of Pfizer's combination with Botox-maker Allergan isn't that far off from the total annual gross domestic product in Ireland (the merged company's planned home base). The transaction is on the pricey side, and there are fewer synergies to offset the expensiveness than there would be with other speculated Pfizer targets such as GlaxoSmithKline. Any significant earnings benefit is probably years down the road, and Bloomberg Intelligence estimates Pfizer will need to make aggressive buybacks to pull even that off. The real draw of the deal, though, is the tax benefits that Pfizer will reap when it takes Allergan's Irish address. For now, the U.S. Treasury looks unable to stand in the way of its inversion plans. Buying Allergan also helps Pfizer set up its established products unit for an eventual spinoff.
Verdict: Allergan may not have been the best option for Pfizer, but the strategy here is more long term. The advantages of a lower tax rate and the value to be unlocked via a breakup can't be ignored, making this a deal that should ultimately pay off.
2. Anheuser-Busch InBev-SABMiller: If it weren't for the $120 billion price tag and the underlying assets being beer, investors would be far less intrigued by AB InBev's takeover of SABMiller. Sure, together they will be by far the strongest brewer in the world, generating half of the industry's profits. But sales at both businesses -- which own Budweiser and Peroni, among other brands -- are slipping this year. Analysts estimate a steady 6 percent annual rise in AB InBev's sales after 2016, while projections for SABMiller are lumpier. Consumers are increasingly seeking out newer craft brands, and while the combined company could keep buying up those smaller brewers, to do so may lessen their allure since it takes them from craft to mainstream. Finding growth in this industry is getting hard.
Verdict: The merger had been bandied about so long that it got a fun nickname -- "MegaBrew." But considering the beer giant will still have to grapple with decelerating growth, this deal looks more like a mega-fizzle.
3. Royal Dutch Shell-BG Group: Shell was the only major energy explorer to strike a big deal in 2015, and in this case, there are no prizes for going first. Since the company announced its roughly $80 billion purchase of BG Group in April, oil prices have tumbled 40 percent, sending its own stock reeling, too. While the logic for the deal is sound -- BG Group helps Shell load up on untapped oil reserves and expand its natural gas projects -- Shell has received backlash for the overly optimistic oil price outlook it used to justify the high price tag. To win investors over, it's promised bigger cost savings, but that may not be enough to make the math work.
Verdict: The bad timing puts Shell under pressure to translate the strategic logic into a boost for the bottom line. That's not going to be easy and investors could get stuck with a dilutive deal and a lousy return on investment.
4. Charter-Time Warner Cable: Charter was there to stop Time Warner Cable's fall after its planned combination with Comcast was scrapped due to regulatory opposition. Charter's $79 billion bid is no antitrust slam dunk either, but it has better odds. Even though Charter had to offer more for Time Warner Cable than Comcast did, its own rising valuation helps safeguard it from overpaying. Charter stands to almost quadruple its number of cable subscribers through the deal, adding scale that will increase its negotiating power with TV programmers.
Verdict: As long as Charter can navigate the hefty debt load it's taking on for the purchase, combining with Time Warner Cable will make it a stronger company and better able to fight back against the cord-cutting phenomenon and competition from online services.
5. Dow-DuPont: After seed giant Monsanto failed to clinch a takeover of its European pesticide maker Syngenta, Dow and DuPont moved forward with a $100 billion-plus deal of their own to grab bragging rights for the biggest transaction in the chemical industry. (Syngenta is still being courted, but that's probably a story for next year). The all-stock merger of equals is highly tax-efficient and promises significant cost savings, But there's also big value in the companies' plan to subsequently break into three businesses focused on agricultural products, commodity chemicals and specialty chemicals. Investors won't get to see those spinoffs completed until 2018, though, and commodities markets (and thus Dow and DuPont) will continue to be pressured in the meantime.
Verdict: The long timeline and complicated two-step process is damping investor enthusiasm over the deal, but this is one that makes a lot of sense and will create stronger -- but more focused -- chemical powerhouses, without a huge hit to the balance sheet.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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