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Billionaire investment guru Warren Buffett once wryly remarked: "When a chief executive officer is encouraged by his advisors to make deals, he responds much as would a teenage boy who is encouraged by his father to have a normal sex life. It's not a push he needs."
The urge to merge
Of course, CEOs have big egos, and nothing boosts their self-esteem (and personal wealth) quite so much as a huge (and, ideally, transformational) deal.
While CEOs claim that it's cheaper to buy than to build, mergers and acquisitions frequently have a destructive effect. Indeed, they can easily turn two plus two into something considerably less than four.
For instance, a recent survey by KPMG showed that a third of deals boost the buyer's share price, a third do nothing to it, and a third reduce the buyer's share price. Thus, two-thirds of M&A deals spell bad news for the buyer's shareholders.
On the other hand, the latest research by consultancy Towers Watson and the Cass Business School found that publicly listed companies making big acquisitions sharply outperform their peers over the following quarter. Towers Watson found "a sustained outperformance for acquirers over the last three years of the research."
However, this may prove to be a short-term quirk, fueled by bargain-basement prices during the global financial crash.
I'm something of an M&A skeptic, even going so far as to make an anti-M&A speech at a London function in 2004. At this conference, I argued that these deals were good for city professionals but bad for shareholders as a whole.
In my experience, the seller's shareholders often profit at the expense of the buyer's shareholders, a situation known as "the buyer's curse." Also, M&A activity provides fat fees to investment bankers and higher remuneration for board directors, yet acquisition sprees frequently disappoint companies' owners -- their shareholders.
I favor smaller, bolt-on acquisitions to high-risk mega-mergers. Too often, operational problems undermine the rationale for doing such deals.
Here are four examples of big deals gone bad -- among Mr. Market's worst.
For sheer destruction of shareholder value, Vodafone's
In February 2000, just before the tech bubble burst, the agreed merger of Vodafone AirTouch and Mannesmann created a telecom giant. The 112-billion-pound all-share deal to acquire Mannesmann turned the merged group into the world's fourth-largest company, worth 224 billion pounds.
Today, 11 years after the dot-com bubble burst, Vodafone is the UK's third-largest company, with a market capitalization of 87 billion pounds. So Vodafone is worth 137 billion pounds (61%) less today than it was before this titanic deal went through. Oops.
2. AOL Time Warner
In another example of disastrous, top-of-the-market folly, U.S. media giant Time Warner
Hailed as a visionary "deal of the century," the merger completed a year later, with AOL paying $164 billion in shares for Time Warner and the new entity split 55%/45% in favor of AOL.
AOL and Time Warner parted company in December 2009, after almost nine years of nightmares. In less than a decade, the tie-up had destroyed close to $200 billion of shareholder wealth.
Today, AOL Time Warner is seen as the poster child for the dot-com madness and is used by business schools to show how not to do a deal.
3. Glaxo Wellcome/SmithKline Beecham
In December 2000, two of the UK's largest pharmaceutical companies, Glaxo Wellcome and SmithKline Beecham, came together to form global giant GlaxoSmithKline
At that time, GSK's share price was close to 21 pounds, valuing the firm at close to 110 billion pounds and putting it in the top three of the FTSE 100. Today, more than 10 years on, GSK's share price is around 13 pounds, or 38% lower than at the time of the merger.
Thus, the GW/SKB tie-up has destroyed roughly 40 billion pounds of shareholder wealth.
Lastly, I offer a failed deal -- one that failed to complete yet still caused major headaches for the putative buyer.
In March 2010, UK insurance giant Prudential
Following regulatory concerns and shareholder revolt, Pru abandoned this deal three months later, having failed to cut the asking price by $5 billion. This left Pru with deal costs nearing 1 billion pounds and CEO Tidjane Thiam with egg all over his face.
What do you think was the worst deal in history? Please tell us in the comments box below!
More from Cliff D'Arcy:
Cliff D'Arcy owns shares of GlaxoSmithKline, as does The Motley Fool. Vodafone Group is a Motley Fool Inside Value pick. GlaxoSmithKline is a Motley Fool Global Gains selection. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.