NEW YORK (Reuters Breakingviews) - As the most recent merger boom winds down, the broken promises of over-eager corporate executives will begin to emerge in earnest. Contrary to the Wall Street spin, one plus one rarely amounts to more than two. The progress of three transactions from the start of the current cycle illustrates the ways investors will be let down in 2017.
Worldwide M&A reached $3.3 trillion through December 2016, according to Thomson Reuters, down 18 percent from the record-setting year that preceded it. The crop includes mega-deals like AT&T’s proposed $85 billion takeover of Time Warner and Abbott Laboratories’ $25 billion acquisition of St. Jude Medical.
Some matches will work out as overlapping businesses generate cost savings that fall to the bottom line. In many cases, however, the market prematurely gave CEOs the benefit of the doubt. Disasters like Time Warner-AOL or Vivendi-Universal, which followed the fin-de-siècle surge, may be avoided, but deals struck in poultry, jewelry and artificial limbs provide a sneak preview.
Start with Signet Jewelers. In February 2014, early in the merger bonanza, the diamond merchant bid $1.4 billion for rival Zales. The projected synergies didn’t materialize, sales disappointed, Signet’s accounting needed revising and a private equity firm was brought in to shore up its finances. Its stock has underperformed the S&P 500 Index since unveiling the deal, and is down 10 percent since it put a ring on Zales.
Then there’s medical-device maker Zimmer. Its $13.4 billion purchase of rival Biomet in 2014 is, so far, an example of why not doing deals is often preferable. While Zimmer’s shareholders have watched the value of their stock rise by 12 percent since pouncing on Biomet, rival Stryker, which sat out the frenzy, has delivered three times more.
Lastly, consider Tyson Foods. Since successfully bidding for sausage maker Hillshire Brands in May 2014, its equity value has expanded by less than the $7.7 billion it handed to Hillshire’s owners. Tyson recently warned that earnings would not meet expectations and parted ways with its CEO.
Tyson, Signet and Zimmer could yet live up to their commitments. In the meantime, expect other big acquirers to join them in failing to make good on their corporate-finance calculus.
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