Big deal – Why the Pfizer/Allergan mega-merger is a mega-warning for investors
$160bn (£106bn) deal between US drugs giants Pfizer and Allergan weighs in at number three on the all-time list of mega-mergers. For its part, the proposed tie-up between the, ahem, ‘beerhemoths’ AB InBev and SABMiller will rank fourth on that list. Is this all a sign of the times?
Here on The Value Perspective, we would certainly say so – and, in keeping with the size of the deals, a pretty big sign at that. To illustrate our point, the following table shows some key metrics from the 10 all-time largest ‘pure’ merger and acquisition (M&A) deals – that is, excluding the spin-out of Philip Morris from Altria and Verizon’s purchase of Vodafone’s stake in the companies’ joint venture.
Probably the first thing that leaps out is the dates the mergers were announced, with almost all being near – or indeed, in a couple of cases, at – market highs. This is underlined by the high valuations on which the deals were done – an EV/EBIT (enterprise value to earnings before interest and tax) ratio that averages almost 35x. We may reasonably presume the earnings would have been pretty peaky too.
All very expensive then but arguably of greater interest is how the companies fared in the five years after their deals were announced. An average fall of 30% – admittedly dragged down heavily by a post-ABN Amro Royal Bank of Scotland yet with only three companies edging into positive territory – would suggest the market was not overly impressed by any of the mergers.
Speaking of which, the market’s own poor performance in the years after these deals makes a couple of eloquent points in itself. One is that, no matter how badly the wider market did, in most instances the mega-mergers ensured their authors were unable to keep up. The other is that this once again underlines what we said at the start – these big deals tend to happen at the top of the market.
All of which means the following chart, which confirms the point made in pieces such as Carry on regardless and Get your coat that 2015 has been a boom year for M&A, should give pause for thought. Markets tend to be cyclical beasts and so, whether you are a business or an investor, paying a high price in the belief the good times can last for ever is rarely the recipe for a happy ending.
Source: Bloomberg, November 2015
Fund Manager, Equity Value
I joined Schroders in 2015 as a member of the Value Investment team. Prior to joining Schroders I was responsible for the UK research process at Threadneedle. I began my investment career in 2001 at Dresdner Kleinwort as a Pan-European transport analyst.
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