Investments: Watch out for megamergers
Business leaders had plenty of reasons to act cautiously in the first half of 2019, said Stephen Grocer in The New York Times. Economic growth slowed markedly, and the trade war with China seemed unending. But CEOs “looked past all that to strike big deals at a record pace.” In June alone, more than $400 billion in acquisitions was announced in the U.S., lifting the value of expected deals for the year so far to above $1 trillion, a new record. This surge has been powered by “a flurry of so-called megamergers—those valued at $10 billion or more.” The U.S. has seen 21 megamergers already in 2019, accounting for 63 percent of the overall value of American mergers. They include pharma giant AbbVie’s $63 billion deal for Botox-maker Allergan, and the $86 billion merger of defense titans United Technologies and Raytheon. Despite rosy corporate projections of cost-saving synergies, “big-time mergers can result in big-time mayhem for shareholders,” said Jeff Reeves in MarketWatch.com. Consider the $36 billion merger of Kraft and Heinz in 2015. Cost-cutting “left the product line behind consumer tastes,” while write-offs and a regulatory investigation sank the stock by more than 50 percent.
Investors have learned to be skeptical of blockbuster deals, said Tara Lachapelle in Bloomberg.com. In past years, “the market got swept up in a merger wave that promised to revive earnings growth.” Some acquirers’ stock prices rocketed up because “shareholders were just glad to see the companies do something with all their cash.” Not anymore. So far this year, the stock price of an acquirer in a $20 billion merger dropped by an average of 5.9 percent on the day the deal was announced. AbbVie plummeted 16 percent on the day it revealed the Allergan purchase. “That reaction is understandable,” said Charley Grant in The Wall Street Journal. After all, the megamerger required AbbVie to take on an extra $38 billion in debt, on top of the nearly $32 billion in debt already on its books. “But standing pat wasn’t a palatable option.” With the patent for its $19 billion–a-year arthritis drug Humira expiring soon, AbbVie desperately needs new growth sources. That’s why it swung for the fences, and why other pharma giants will inevitably look to megamergers to secure their own future.
Big Pharma might have to gamble on risky M&A deals, said Max Nisen in Bloomberg.com, but that doesn’t mean you need to follow suit. “Of the eight biopharma deals worth more than $40 billion that closed in the last 20 years, only one delivered better returns than the S&P 500” five years later. That was Merck’s $47 billion acquisition of Schering-Plough Corp. in 2009. A safer bet for ordinary investors? “Try an index fund.”