There has been much written about how corporate acquisitions are not necessarily good news for the owners of companies. in 2016 the Harvard Business Review indicated that 60% of the deals it reviewed destroyed shareholder value. As an ex-analyst, I know that I became increasingly sceptical about the claimed level of synergies which were often trotted out to justify why a company was paying a share price premium, often 30% or more, to bid for a rival.
However, a nil-premium merger of equals should ensure that, at the very least, two plus two can equal four, and assuming some merger synergies, four can easily become five.
But theory does not always equal practice.
Earlier this week, the two large US tobacco companies, Altria and PMI, announced that they were investigating a merger of equals. Since then, the combined market capitalisation of the two companies has reduced, at one point being down USD$18bn, or c.15%.
Ironically, Altria and PMI were once one company, which was demerged in 2007. So this proposed move restores the old status quo.
So what is going on here? Does this deal create dissynergies?
It may be that some of the investor reaction here is tobacco-specific. The logic for the demerger in 2007 was to separate the US tobacco assets (Altria) from the international business (PMI), for regulatory reasons, and certainly some of the media commentary suggests that this regulatory risk has not gone away.
It has not been helpful that both companies have merely confirmed discussions, without providing any rationale for these. There is no indication yet of cost synergies (most analysts rate these as de minimis given the lack of geographical overlap), or revenue opportunities (potentially seen as larger, particularly with the potential of vaping products across the world).
And this merger discussion also seems to move away from current consumer company thinking that “small is beautiful”. FMCG companies are putting increased focus on regional and local brands and less on their traditional global brands, and this has created some pressure for smaller operating units. After all, it is only a few years since, in the food industry, Mondelez was split off from Kraft Foods. And global reach is no longer seen as the holy grail. Recently the largest global beer company, AB Inbev, explored the spin-off of its Asian arm, and when it could not get the right price, sold off its Australian business instead.
I think one conclusion that we can draw is that the investment community, and the media, are becoming harder to convince about the upside potential from M&A in any shape or form. Having become, quite rightly, sceptical about acquisitions creating value, even mergers of equals appear to be less convincing. So if companies are about to announce a deal, it has become even more crucial for them to have their ducks in a row on the investment rationale and to be pro-active in selling this to different stakeholders.
For Altria and PMI, the decline in the combined market capitalisations this week gives them a difficult starting point if their discussions are successful and they then have to sell the deal to their own shareholders. They will both have to step up their game with clear and comprehensive communications to explain the benefits. And if they do not succeed, to use that tabloid phrase, this deal could well go up in smoke.