Interesting article in the New York Times about the dearth of strategic buyers in the M&A market (see Battling Headwinds).
It's true that some blockbuster strategic deals have been announced recently, including AT&T's $39 billion proposed acquisition of T-Mobile from Deutsche Telekom and Nasdaq's $11.3 billion unsolicited bid for NYSE Euronext.
But these deals belie a strange fact: strategic bidders, or bidders that are operating companies, appear hesitant to re-enter the takeover market.
The article highlights some recent deals in which strategic bidders were conspicuously absent, and then attempts to explain the increasing reticence of strategic acquirers to participate in the M&A market as due to a changing mindset among executives.
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Private equity firms have historically been at a disadvantage on how much they can offer. Strategic bidders can often realize greater cost savings and synergies by eliminating duplicative functions and combining and operating the acquired company more efficiently within their other operations.
This advantage was partly eclipsed in the cheap-money years before the financial crisis. But we are supposed to be back in more normal times, so why are strategic buyers hanging back?
The apparent reluctance may be the result of a fundamental reassessment of the value of takeovers, one that was occurring even before the financial crisis. Since then, chief executives and boards have been more concerned with running their businesses and surviving than with chasing expansion through takeovers. This is particularly true when the chance of success is far less certain, as in hostile takeover attempts.
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The last 15 years have produced mergers that proved to be spectacular failures. AOL's merger with Time Warner and Daimler's acquisition of Chrysler are among the most notable. Together, these deals destroyed more than $150 billion in shareholder value.
During this time, studies have shown that while there are gains to be made, many M&A deals prove unsatisfactory for buyers. McKinsey & Company estimates that only a third of merger deals create value. In a separate study, Prof. Robert F. Bruner, dean of the Darden School of Business at the University of Virginia, found that almost half of deals failed, although these results were skewed by some spectacular miscues.
These studies illustrate that achieving a successful merger is hard work, requiring strategic vision and a focus on integrating the acquired company.
Although that's a compelling explanation, I'm not sure I'm buying it.