Big merg­ers show cap­i­tal­ism’s bad side

Business Daily (Kenya) - - EDITORIAL & OPINION - ED­WARD HADAS Reuters Break­ingviews colum­nist

Any­one who be­lieves that prices should be fair would agree that Cel­gene needs a cor­po­rate shake-up — just not the one the US phar­ma­ceu­ti­cal com­pany is about to get. From that per­spec­tive, the pro­posed $74 bil­lion shares-and-cash takeover by Bris­tol-my­ers Squibb an­nounced last week looks like a re­ward for un­just be­hav­iour.

For a stu­dent of cor­po­rate ethics, Cel­gene’s big­gest prob­lem is cer­tainly not that it is too small. Rather, the com­pany is too prof­itable. Af­ter mak­ing some rea­son­able ad­just­ments to the re­ported num­bers, the can­cer spe­cial­ist’s op­er­at­ing profit mar­gin in the most re­cent quar­ter was a stun­ning 55 per cent. That is the money left af­ter pay­ing re­search and de­vel­op­ment costs. The drug prices which gen­er­ate that sort of prof­itabil­ity for share­hold­ers are al­most cer­tainly un­justly high.

Now in­vestors who have al­ready been gen­er­ously re­warded are set to gain even more. The pro­posed takeover val­ues Cel­gene at roughly 50 per cent more than its share price be­fore the deal was an­nounced.

The his­tor­i­cal ex­pe­ri­ence of big deals sug­gests that Bris­tol-my­ers Squibb share­hold­ers should worry the price is too high for their good. Stud­ies con­sis­tently sug­gest that the tar­get com­pany’s eq­uity hold­ers typ­i­cally re­ceive a dis­pro­por­tion­ate share of any ben­e­fits from a large merger.

Yet even though there are good rea­sons for in­vestors to be wary, this is un­likely to be the last big deal. Ex­ec­u­tives like the pres­tige that comes with scale, and they al­most al­ways think that they can do bet­ter than av­er­age. Be­sides, it is easy to sketch out cost sav­ings — Bris­tol-my­ers Squibb is pre­dict­ing a 10 per cent re­duc­tion in the com­bined com­pa­nies’ cost base — and also easy to ig­nore what could go wrong. Smooth-talk­ing and ex­tremely well-re­warded ad­vis­ers can usu­ally as­suage any doubts.

The ex­plicit goal of such large com­pany com­bi­na­tions is to in­crease share­holder value. While such gains of­ten prove elu­sive, the losses suf­fered by many other con­stituen­cies are all too pre­dictable.

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