Wall Street’s merger business is running out of road on Easy Street. Since July, only about four out of 10 U.S. corporate buyers have experienced a rise in their stock prices after announcing an acquisition of at least $1 billion, according to Thomson Reuters data. That’s the first dip below half in four years. The end of an M&A boom may be nigh.
After a long barren spell following the financial crisis, chief executives regained their confidence to go shopping early last year. Initially there was an ample supply of straightforward combinations, often packed with cost savings to justify the premiums being paid. When investors reward buyers, it motivates bankers to unload their pitch books, CEOs to push for acquisitions and boards to sanction them. Worldwide merger activity surged to $3.4 trillion last year.
In the first quarter of 2014, 80 percent of buyers unveiling deals were treated to a higher market value. Shareholder appreciation waned throughout the year, only to rebound from January to March 2015 to a rate of 70 percent. The backlash of the past three months may, however, last longer.
One reason is that mergers are becoming more adventurous and complicated – with many also depending on revenue gains, not just cost cuts, for their financial rationale. Even in late June, when Energy Transfer Equity unveiled a $53 billion bid to buy U.S. pipeline operator Williams, its shares tumbled 6 percent. On Monday, they fell another 13 percent even though investors already knew pretty much what to expect. There may have been technical trading factors, but the deal also creates the sort of colossally entangled organization that tends to fall out of favor in more cautious times.
XPO Logistics suffered a 13 percent loss of market value when it unveiled plans earlier this month to buy trucking operation Con-way for $3 billion. The deal marks a move into a more cyclical business and will require heavy borrowing. Meanwhile, Coty’s $12.5 billion plan to absorb Procter & Gamble’s beauty arm uses a complex Morris Trust structure, which may have contributed to the unfavorable shareholder reaction. Aetna’s immediate stock decline from its $37 billion Humana deal is in part down to the competition limits being tested.
It’s easy to blame investors rattled by a bout of volatility for the change of heart about M&A. More plausibly, it’s the deals themselves that are becoming too volatile.