Just last month, Sprint and T-Mobile shook up the cell phone industry as the two decided to merge in what’s an estimated $26 billion deal. This combination was years in the making and immediately makes the entity a major player in the sector, rivaling AT&T and Verizon.
If it seems like you’ve been hearing a lot about M&A megadeals recently, it’s because you have. In fact, according to Pitchbook, 2018 is on pace to have the most megadeals ($5 billion or more) since 2007. In addition to Sprint/T-Mobile, there’s Walmart’s $16 billion deal to buy India’s leading e-commerce company, Flipkart. Plus there’s Cigna’s plan to purchase Express Scripts for $52 billion and Microchip Technology buying Microsemi. And there are many more where those came from. While they didn’t make it into the 2018 list, December 2017 brought about CVS/Aetna and Disney/Fox announcements. So what’s driving this trend? Who are the big winners and losers? And what does it mean for the market?
In the first quarter alone there have been 26 M&A transactions considered “megadeals,” nearly triple the level of just one year ago. Industry experts believe this is just the start of something big. According to Steve Krouskos, global vice chair of transaction advisory services at Ernst & Young, “I think it will be a great year, one of the top three if not a record.”
The Financial Times spoke with bankers and lawyers and found a combination of business confidence and U.S. tax cuts have kicked this market into overdrive. The publication goes on to note that there’s also a desire by corporate executives and boards of directors to “head off disruptive technological threats and accelerate growth.” Dealmaking in Europe is busy too. Reuters reports record levels of M&As in Europe during the first quarter of 2018, reaching a total of nearly $500 billion.
When billions of dollars are at stake like in a merger or acquisition, there are bound to be winners and losers outside of the companies themselves. According to a 2015 story in MarketWatch, “Unless you’re a CEO or shareholder, a merger or acquisition usually isn’t good news.”
For shareholders of the target company, M&As can mean big money. Analysis from Factset showed that in the first quarter of 2018, U.S.-based deals delivered a 27 percent premium. In the near term, shareholders of the firm doing the acquiring typically see a brief dip in the stock price, but these are often just short-term situations. CEOs of the acquirer are usually big winners too because they’re now overseeing a larger entity, and as such, believe they’re deserving of more pay to keep on par with their peers. Those running the ship on the company being bought often lose their jobs, but they typically receive golden parachutes worth millions. And, of course, there is money headed toward the investment bankers, lawyers and consultants working on all phases of the deal and even through the integration of the entities.
The losers, well, that can vary from deal to deal. Depending on the scope of the transaction, sometimes the biggest losers can be the rank-and-file employees. More times than not, large transactions result in redundancies in any number of areas of the business. So to streamline operations and keep costs down, layoffs or buyouts are par for the course. Depending on the size of the reductions and whether it means something like a plant shutdown, this can also impact cities and their tax base. Another loser in a megadeal can also be the consumer. Less competition can reduce incentive to develop new products and services. It also creates the potential for higher prices.
Of course the biggest question of all is “Do megadeals succeed?” For the answer to that question, it depends on who you ask and what their definition of “success” is.
CNN wrote in 2009 “Corporate mergers fail for some of the same reasons that marriages do — a clash of personalities and priorities.” They went on to cite such high-profile failures as AOL/Time Warner and Daimler/Chrysler among others and noted a 2004 study by Bain that found 70 percent of mergers did not increase shareholder value. However this sentiment is not shared by everyone.
Steve Kaplan, a professor at the University of Chicago’s Booth School of Business, wrote in 2016 that most mergers, in fact, create value.
“If we are interested in whether the management of the acquiring company should have done the deal, our main concern will be what happens to the bidder,” Kaplan writes. “If, however, we care more about whether the merger is good for the economy or for society at large, the correct focus should be the combined value the merger creates or destroys.”
Kaplan notes that research suggests mergers driven by creating efficiencies and reduce costs rather than those looking to increase revenues.
While defining success of a megadeal can be subjective, what can’t be argued is that we’re in the midst of a booming time for these kinds of transactions. With a pro-business administration in Washington, a booming stock market and lower taxes, it’s clear that this new era of the megadeal in M&A isn’t going to end any time soon.