Will Buffett Break the Takeover Jinx?
It's the start of a new work week, and more mergers and acquisitions news is in the air. This time it's speculation that Office Depot Inc. and OfficeMax Inc., the No. 2 and No. 3 office-supply retailers, respectively, are talking about combining to compete against industry-leader Staples Inc. This follows a week in which H.J. Heinz Co. agreed to be bought by a group headed by Warren Buffett's Berkshire Hathaway Inc., and AMR Corp.'s American Airlines and US Airways Group Inc. agreed to merge.
The reasons for this outburst of acquisitiveness include company executives being encouraged about consumer confidence and spending; signs that the global economy is recovering; the euro-area crisis is in remission; and, of course, all that cash sitting on corporate balance sheets. And maybe, as my colleague Paula Dwyer wrote last week, there's something in the air. It sure seems that deals beget more deals.
Yet most of these deals probably will disappoint investors, based on the record over the years. There is little reason to think this time is different. (OK, Buffett might be an exception.)
Maybe a brief recounting of a few of the more ballyhooed betrothals will refresh collective memories.
Any history of corporate takeovers has to start with the biggest and the baddest atop the M&A league rankings, the $186 billion merger of America Online Inc. and Time Warner Inc., announced in January 2000, just before the Internet mania was about to fizzle. This was supposed to be a deal for the ages, melding old-line media such as Time magazine and the Warner Bros. film studios with AOL's then-dominant Internet service. But this combination destroyed more than $100 billion in shareholder value. The companies have since split; Time Warner is doing what it did before the deal, while AOL has been left behind by the likes of Google Inc. and Facebook Inc.
The second-biggest deal, Vodafone Airtouch Plc's $185 billion acquisition of Mannesmann AG, didn't fare much better. From their peak shortly after the deal was announced in November 1999, Vodafone shares have lost almost two-thirds of their value, and the company had net losses in six of the 10 years after the merger.
How about Pfizer Inc.'s $87 billion purchase of Warner-Lambert Co., the same month as the Vodafone deal, to gain valuable patented medications such as the cholesterol-reducing drug Lipitor? A disappointment for Pfizer shareholders, who have seen the stock lose almost half its value.
It isn't just shareholders who have been losers in the takeover business. Most of the U.S.'s biggest banks, and many of Europe's, are the result of multiple acquisitions. Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and JPMorgan Chase & Co. have either cost investors dearly or, at best, treaded water during the past five years. Even worse, acquisitions were the vehicle for turning each of these companies into a too-big-to-fail bank. Taxpayer money probably would be tapped should any of them be poised for collapse.
Why corporate takeovers don't pay off has been a rich vein for academic research over the years. One study from last year, ``Winning by Losing'' by three economists at the National Bureau of Economic Research, tried to sort this out by comparing the shares of companies that were bidding for the same acquisition target. The conclusion was that the loser's shares outperformed the winner's by 50 percent during the next three years. Although the authors didn't draw this conclusion, this suggests that bidding wars lead to overpayment.
Another finding was that buyers who paid in cash did worse than those who paid with stock. Maybe that's because sellers, some of them no doubt employees of the target, have little interest in the welfare of the combined company.
How about cases when the takeover is uncontested or friendly? Some, as noted above, have been duds. My own theory is that certain types of buyers can show increasing profits and rising share prices for a time without too much trouble, particularly when the businesses are similar. There are duplications that can be eliminated; people to fire; and redundant stores, factories or offices to close. If managed right, costs can be cut by more than any loss in revenue.
And the incentives for some executives to turn their companies into perpetual eating machines are inexorable. Aside from the adrenalin thrill and ego enhancement that comes from a big deal, executive pay is often tied to share performance, return on equity or comparisons to an industry-specific benchmark -- all of which can be goosed temporarily with acquisitions. The machinery stops working, though, when there's no more takeover fodder or antitrust regulators step in.
So what to make of the latest spate of corporate hookups? From an investor's standpoint, it would be preferable if companies did something with their cash other than make acquisitions, say build new factories, increase hiring or spend more on research and development. Better still, increase dividends and let shareholders figure out what do with the cash.
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