Better wait before toasting a new wave of mega M&A deals. The purchase of BG Group by Royal Dutch Shell for 70 billion dollars, according to operators, may not be the signal for the start of a series of M&As. At least the big ones.
Risky marriages
First we need to see if the marriage will work out. Financial history is filled with mergers and acquisitions that foundered or failed to deliver on promises. A case that has become familiar by now is the union between Daimler and Chrysler in 1998, which ended 10 years later with billions of dollars in losses for both the Germans and the Americans. That experience had the merit of teaching companies to tread lightly. 2014 recorded the highest number of acquisition proposals first announced and then withdrawn. A phenomenon not seen since 2008, in the midst of the financial crisis triggered by subprime mortgages. Despite this, it must be added that at the end of last year the value of mergers and acquisitions in the United States alone reached the monstrous figure of 1.600 trillion dollars, up 43% compared to 2013.
Furthermore, mergers (and even the richest ones) are often not a good deal for shareholders. Especially the small ones. “Minority shareholders are forced to suffer the price of their shares that others have set,” explains a study by AdviceIQ. “This can have serious effects on the direction of the entire portfolio. Many small investors get frustrated when holding stocks that go up and down not as a result of normal market dynamics, but as a result of discussions about a merger or acquisition.” When the operation has been carried out, other problems often emerge: the integration of two different working methods, the loss of productivity during the change of management, new debts and unexpected expenses. All elements that weaken the financial position of the new company.
Only problems?
So should M&As worry investors? Not necessarily. “An increase in mergers and acquisitions is usually a sign that the economic cycle is moving in the right direction,” explains a report signed by Grant Engelbart, manager of CLS Investment. "The valuations we've seen lately, however, make us think we're unlikely to see similarly rich deals." Then there is another element to consider. “54% of M&A deals seen in the last 12 months were done through the use of cash while very few were done using equity swaps,” Engelbart says. “This tells us that companies are looking for smart ways to use money that has been sitting in the balance for too long.”
