THE return of global M&A in 2010 has been cited as unambiguous evidence corporations are feeling more confident about themselves. The wealth of mega-deals on both sides of the Atlantic is surely a sign we are on the path to the broader macro-economic recovery we all crave. However, the tragedy is that a large amount of this merger activity will turn out to have been a complete waste of money.
There is strong evidence to suggest that, for every penny of money spent on good acquisitions, there is at least another wasted on deals which, even at the time – let alone with hindsight – are examples of boardroom folly and ego. In terms of ultimate shareholder returns, using free cashflow to increase dividends has historically wiped the floor, compared with the alternative of using that cash for acquisitions.
From Vodafone to RBS, from Marconi to GlaxoSmithKline, the waste has been dramatic. To use just one example, take a look at the value of GlaxoSmithKline back in January 2000, at the time of the merger that was supposed to create a pharmaceutical titan that would be a catalyst for stunning growth. In January 2000, GSK was valued on the market at £114bn. And today? The market cap as of Friday was around £66bn. A decade and a fall in value of £50bn.
Companies still don’t appear to be learning the lessons. Take a look at Hewlett Packard’s frenzied bidding for data storage group 3Par. Was the near $2bn (£1.28bn) price tag a fair deal for a company that has not made money for five years? Or was it all about beating Dell? Unfortunately, this deal has not been, nor will it be, the only example of the wasting of shareholder funds as companies pile on the cash.
Bob Parker, senior advisor at Credit Suisse, draws my attention to the cash mountain being stashed up by corporates everywhere. US non-financial cash-asset ratios are at 25 year highs.
“Last year there was sensational value and opportunities in distressed companies but, while it is impossible to generalise, more and more companies are going to be overpaying and regretting it later,” says Parker.
It isn’t only the companies themselves who are to blame. One FTSE 100 boss told me that he won’t even talk to City dealmakers anymore, adding: “I am fed up to the teeth with 30-year- old investment bankers, who have absolutely no experience in my industry, telling me about the industrial logic for this disposal or that bolt on acquisition. What do these people know?”
Not all CEOs have the iron will to resist the City and Wall Street’s snake oil salesmen. The sorry reality is that hard fought financial stability can be lost in one moment of M&A madness.
Steve Sedgwick is a presenter on Squawk Box Europe each weekday morning on CNBC.