Big mergers show capitalism’s bad side
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.