Schumpeter

Riding the wave

Corporate dealmakers should heed the lessons of past merger waves

Oct 5th 2013 | From the print edition

WHY mergers and acquisitions (M& ! come in "a#es is not $u%%& understood' (ompanies) $ortunes are a$$ected *& the econom&)s e** and $%o"+ *ut this does not seem enough to e,p%ain "h& merger acti#it& crests and *rea-s so dramatica%%&' Yet crest and *rea- it does' .n merica there ha#e *een at %east $i#e merger "a#es+ in "hich the num*er o$ dea%s s"e%%ed+ pea-ed then tum*%ed' /he $irst+ in the 1020s+ ended "ith the onset o$ the 1reat 2epression' .t "as %ess o*#ious "h& the $o%%o"ing ones3in the 1040s and then in each decade since 10503"ere so strong' 6o"+ sa& some e,perts+ a po"er$u% si,th "a#e is $orming' /he e#idence is $ar $rom conc%usi#e' spate o$ dea%s ear%ier this &ear+ inc%uding merican ir%ines) announcement that it and 78 ir"a&s "ou%d $%& o$$ together (a p%an no" de%a&ed *& the antitrust authorities! and the s"a%%o"ing o$ Hein9 *& Warren :u$$ett)s :er-shire Hatha"a&+ had "a#e; "atchers arguing o#er "hether this "as the start o$ something *ig' /hen there

seemed to *e a *it o$ a %u%% unti% the <35 *i%%ion com*ination o$ t"o ad#ertising giants+ Omnicom o$ merica and =u*%icis o$ France+ "as announced in >u%&+ soon put in the shade *& ?eri9on)s <130 *i%%ion *u&;out o$ ?oda$one)s sta-e in its merican mo*i%e;phone interests+ un#ei%ed in ear%& 8eptem*er' Wor%d"ide+ the #a%ue o$ M& dea%s in the $irst nine months "as on%& s%ight%& higher than during the same period %ast &ear' 6e#erthe%ess+ @We ha#e no" entered the third phase o$ the M& "a#e+ "hen "e can e,pect the num*er o$ dea%s to rise $ast+A argues =eter (%ar-+ "ho has "ritten+ "ith a $e%%o" academic+ Boger Mi%%s+ a ne" *oo-+ @Masterminding the 2ea%A' 2ra"ing on a "ea%th o$ academic studies+ it argues that merger "a#es ha#e $our distinct phases+ "hich are most%& a re$%ection o$ changing *usiness con$idence' s spirits rise in *oardrooms and on trading $%oors+ so does the num*er o$ dea%s3and their cost' .n the $irst phase+ usua%%& "hen the econom& is in poor shape+ Cust a hand$u% o$ dea%s are struc-+ o$ten desperation sa%es at *argain prices in a *u&er)s mar-et' .n the second+ an impro#ing econom& means that $inance is more readi%& a#ai%a*%e and so the #o%ume o$ M& rises3*ut not $ast+ as most dea%s are regarded as ris-&+ scaring a"a& a%% *ut the most con$ident *u&ers' .t is in the third phase that acti#it& acce%erates sharp%&+ *ecause the @merger *oom is %egitimisedD chie$ e,ecuti#es $ee% it is sa$e to do a dea%+ that no one is going to criticise them $or it+A sa&s Mr (%ar-' /his is "hen the premiums that acquirers are "i%%ing to pa& o#er the target)s pre;*id share price start to rise rapid%&' .n the merger "a#es since 1050+ *id premiums in phase one ha#e a#eraged Cust 10;15E+ rising in phase t"o to 20; 35E' .n phase three+ the& surge past 50E+ setting the stage $or the catastrophica%%& $roth& $ourth and $ina% phase' /his is "hen premiums rise a*o#e 100E+ as *osses do dea%s so *ad the& are the stu$$ o$ %egend' /hus+ the 1050s merger "a#e ended soon a$ter the disastrous de*t;$ue%%ed hosti%e *id $or B>B 6a*isco *& FFB+ a pri#ate;equit& $und' *estse%%ing *oo- *randed the acquirers @:ar*arians at the 1ateA' /he turn;o$;the;centur& *oom ended soon a$ter /ime Warner)s near;suicida% (at %east $or its shareho%ders! em*race o$ OG' /he trou*%e "ith mergers s "ith unions *et"een Ho%%&"ood stars+ corporate marriages a%% too o$ten end in tears' Messrs (%ar- and Mi%%s rec-on that as man& as t"o;thirds o$ a%% mergers and ta-eo#ers $ai%+ meaning that the& do not de%i#er the *ene$its promised "hen the dea% is struc-' Much o$ this $ai%ure ta-es p%ace during the

third and $ourth phases+ "hen dea%ma-ers) e,u*erance is at its most irrationa%' Mr (%ar- rec-ons that once a *u&er pa&s a premium o$ more than a*out H0E+ the chances o$ a pro$ita*%e marriage $a%% signi$icant%&' %though man& o$ the one;third o$ dea%s that do succeed happen during the $irst t"o phases o$ M& "a#es "hen the premiums paid are %o"er+ it is sti%% possi*%e to $ind astute dea%ma-ing "e%% into the %ater phases+ "hich together %ast around $i#e to si, &ears' /he %i-e%ihood o$ a dea% de%i#ering economic *ene$its is greatest "hen the goa% is to cut costs *& merging t"o simi%ar $irms' Incouraging%&+ this seems to *e the $ocus o$ most o$ the current specu%ation a*out $uture dea%s' Bumours a*ound that $urther conso%idation "i%% ta-e p%ace in industries such as ad#ertising+ air%ines+ media+ pharmaceutica%s and te%ecoms equipment' .n 8eptem*er 8ociJtJ 1JnJra%e+ a *an-+ pu*%ished a %ist o$ "hat it considered to *e %i-e%& dea%s+ inc%uding *re"ing giant : .n:e# *u&ing a ri#a%+ 8 :Mi%%er+ and :H= :i%%iton+ a mining compan&+ acquiring Mosaic+ a producer o$ potash+ a commodit& in "hich :H= is a%read& *ig' Whether the current s"e%% turns into a genuine merger "a#e "i%% depend in part on the *an-ing industr&' .t has p%ent& o$ opportunities $or conso%idation+ *ut a%so much post;crash ris-;a#ersion among managers and scepticism among regu%ators' .n this and other industries there has so $ar *een %itt%e ta%- o$ @strategicA or @trans$ormationa%A mergers+ o$ten euphemisms $or "hen a compan& *u&s its "a& into an un$ami%iar *usiness+ and thus a sign o$ $roth $orming' 8ome $anc& prices ha#e *een paid recent%& $or tech $irms3such as 1oog%e)s purchase o$ Wa9e+ a tra$$ic;mapping $irm+ and Yahoo)s ta-eo#er o$ /um*%r+ a *%ogging ser#ice' :ut the target $irms "ere tin& compared "ith their *u&ers' Ha#e the %essons o$ merger histor& *een %earnedK .n his annua% %etter to shareho%ders o$ :er-shire Hatha"a& in 2005+ Mr :u$$ett descri*ed the trou*%e e#en he had ma-ing a success$u% merger *& quoting :o**& :are+ a countr& singerL @.)#e ne#er gone to *ed "ith an ug%& "oman+ *ut .)#e sure "o-en up "ith a $e"'A 8ur$ers) spirits *eing "hat the& are+ i$ a $resh merger "a#e is indeed gathering strength+ %i-e the pre#ious ones it "i%% sure%& *ring out the darede#i% instincts in *osses' $e" "i%% ride its crestD others "i%% *e tossed into a co%d and un$orgi#ing sea'
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