The bankers and lawyers who specialize in mergers dream of advising on the largest deals. These transactions receive the most media attention, and they generate the highest fees.
But is bigger really better for shareholders?
The research to date is inconclusive. Credible studies have examined large samples of deals, but none of them have reached a firm verdict. There are simply too many other factors that can influence the success or failure of a merger. In mining deals, for instance, a change of just 10 per cent in the underlying commodity price can have a drastic effect on a company’s value.
But the task of measuring success is much easier on individual deals. So we revisited some of the largest Canadian transactions from each of the past five years to see whether they panned out. (All deal values in U.S. dollars.)
2006 – CVRD buys Inco Ltd. ($20.3-billion), Xstrata PLC buys Falconbridge Ltd. ($18.2-billion)
After incredibly contentious takeover battles, Canadian copper and nickel miner Falconbridge and nickel miner Inco ended up in foreign hands, and both firms promised to protect their Canadian employees for three years. Initially, everything looked swell. Xstrata’s stock price more than doubled from the time it first bid. Then the financial world collapsed and the Anglo-Swiss company’s fortunes plummeted. In turn, the miner cut 700 jobs in Sudbury and closed nickel mines in February of 2009 as base metal prices plummeted. Xstrata shareholders are still reeling: the U.K.-listed stock is worth less than half of its peak value. Brazil’s CVRD, now known as Vale SA, looks in better shape, but the company is still worth only about 60 per cent of its pre-crisis peak.
2007 – Rio Tinto PLC buys Alcan Inc. ($38.1-billion)
Of all the deals leading up to the financial crisis, few are cited more often as an example of irrational thinking and overpaying than Rio Tinto’s purchase of Montreal-based Alcan. Within two years of closing the deal, the price of aluminum had been halved and Rio Tinto found itself saddled with $38.7-billion (U.S.) in debt. Overburdened, the mining giant had to raise $15.2-billion (U.S.) in a rights offering to shore up its balance sheet, and yet the firm continued to suffer as aluminum prices dropped. In its most recent quarterly earnings the miner booked an $8.9-billion writedown on its aluminum business.
2008 – Teck Cominco Ltd. buys Fording Canadian Coal Trust ($13.6-billion)
Teck announced its takeover of the giant Western Canadian coal producer in July of 2008; by the time shareholders voted on it in late September, the world looked very different. Lehman Brothers Inc. had failed, American International Group Inc. had been nationalized and global markets were in full-blown panic. Yet the deal went through, and Teck’s stock soon got pummelled, plummeting all the way from more than $40 when the agreement was made to below $4. Desperate for capital, the firm reached out to China to help pay some big debts it had coming due, and in 2009 China Investment Corp. agreed to pay $1.5-billion (U.S.) for a 17-per-cent stake. The stock took off soon after. With Fording’s massive metallurgical coal resource in the Elk River Valley under its wing, Teck’s stock rode high on its heavy exposure to China’s need for steel.
2009 - Suncor Energy Inc. buys Petro-Canada ($18.25-billion)
Suncor struck a deal at a time when the two firms desperately needed each other – and that’s why it worked out so well. As oil plummeted from $147 per barrel down to $40, Suncor had too much debt and faced declining demand. Bulking up by acquiring Petro-Canada’s clean balance sheet prevented the firm from totally cutting its expansion efforts. Today, Suncor, is a better company for it, and the takeover is undeniably part of outgoing chief executive officer Rick George’s legacy. But now Suncor faces a new challenge: oil is back up near $110 per barrel, yet the stock continues to lag. Investors are cautious about escalating oil sands production costs, and the stock is likely to suffer until Suncor can prove it has them under control.
2010 – Kinross Gold Corp. buys Red Back Mining Inc. ($6.1-billion)
It was the deal that was supposed to signal a global recovery. After the European debt crisis exploded in the spring of 2010, Kinross announced in August that it would buy Red Back for a whopping $6.1-billion (U.S.), giving it control of Red Back’s big undeveloped Tasiast gold mine in west Africa. When Kinross unveiled the transaction, many investors worried that CEO Tye Burt was overpaying, while the people who supported him said the market simply hadn’t done nearly the same amount of research. A year and a half later, it’s clear the market was right. Embedded in Kinross’s latest quarterly earnings was a $2.9-billion non-cash goodwill writedown, mostly on the Tasiast mine, even as gold prices hover near $1,800 (U.S.) per ounce. Kinross’s stock is down about one-third from the time it announced the Red Back takeover.