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Buyer’s remorse: Most mergers don’t work out for acquiring company

The Los Angeles Times

NEW YORK — Wall Street’s big business — helping companies buy other companies — is hotter than it’s been in years.

When pharmaceuticals giant Actavis said it was buying Allergan Inc. and Halliburton said it would take over rival oil-field servicer Baker Hughes, Wall Street rang up a rare $100-billion deal day that pushed the total value of mergers globally to more than $3.2 trillion for the year, according to banking research firm Dealogic.

The two merger agreements on Nov. 17 arrived amid cheers from Wall Street analysts and triumphal statements by executives.

“This acquisition creates the fastest-growing and most dynamic growth pharmaceutical company in global health care,” Actavis Chief Executive Brent Saunders said.

Lost in the hubbub: a raft of studies showing that over time, most of the deals will not work out. The buyer, the apparent winner in the deal, will be worse off than before.

“It’s a big risk. You’re willing to pay more for a company than anybody else in the world thought it was worth,” said Mark L. Sirower, author, lecturer and principal at Deloitte Consulting in New York. “You’ve got to do your homework.”

Sirower, a specialist in mergers and acquisitions, is among a number of scholars to compile evidence over several decades showing that, on average, the buyer ends up performing worse financially than its rivals over time.

One study of 302 significant deals, for instance, found that “on average, acquirers underperformed their industry peers in providing returns to shareholders.” Earlier studies showed that as many as 60 percent of all deals turned out poorly for the buyer, with the damage ranging from the marginal to the disastrous.

The data seem counterintuitive, given the hoopla that surrounds most deals. The initial publicity invariably is dominated by the combining firms themselves and their Wall Street matchmakers, which have had plenty of time to polish their sales jobs while deals are being secretly negotiated.

It’s only later that historic flops crop up. Lists of famous mistakes usually start with the 2001 all-stock merger of Time Warner Inc. and America Online Inc., originally valued at $164 billion a year earlier. The lists often include the likes of Daimler-Benz’s $40 billion purchase of Chrysler; Sprint Corp.’s $35 billion deal for Nextel Communications Inc. in 2005; and Ebay Inc.’s $2.6 billion purchase of Skype in 2005.

Although the effects of deals play out over time, markets typically react instantly to the news, typically sending shares of buying companies down and raising prices on would-be sellers.

Sirower and others have found that the market’s first instinct is usually right: Buyers whose stocks fall on a merger announcement usually are underperformers as time goes on. That’s just the opposite for buyers whose shares rose the first day and delivered on early promises.


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