Looking back on the global financial crisis, we often blame mortgage fraud, reckless bankers and lazy regulators for the ruin, omitting that we're partly to blame for believing empty promises of housing and stock market returns.
Let's be sure to remember that during the current merger boom.
In 2015, the total value of mergers and acquisitions set a global record, reaching $4.7-trillion (U.S.). Many Canadians failed to notice, because our biggest buyers were domestic pension funds and Brookfield Asset Management, which inked most of their transactions abroad. But they're now paying attention as blue-chip Canadian companies, such as our biggest banks and pipeline companies, strike deals – the total values of which keep on soaring.
Since Labour Day, Enbridge announced a $37-billion (Canadian) deal to buy Spectra Energy Corp., and Potash Corp. of Saskatchewan Inc. and Agrium Corp. have proposed a merger in a transaction worth $37-billion (U.S.).
The size of these deals alone should give investors pause because they are so close to the largest takeover in Canadian history – Rio Tinto's ill-fated $38.1-billion acquisition of Alcan in 2007. That deal, and others inked around the same time, such as Vale's $20-billion pickup of Inco and Xstrata's $18-billion purchase of Falconbridge, all blew up, serving as ugly reminders that megamergers are extremely tricky to pull off.
As unique as those deals may seem – because they were tied so closely to metals prices and were fuelled by cheap credit during a leveraged buyout boom – they aren't exactly outliers. Famously, The Economist ran a cover story in 1994 simply titled "The trouble with mergers," using a picture of two camels painfully mating as an illustration of what the mergers and acquisitions experience is often like for the parties involved.
Rereading that piece, it's almost eerie to see how many parallels there are to our M&A boom. The current craze seems much safer than the heady days before the financial crisis, particularly for Canadian deals, because they're often friendly transactions, less debt is involved and the takeover premiums are much lower.
"Entailing true romance rather than shotgun weddings, tempting synergies rather than financial opportunism, no rash of mergers has ever seemed more benign, or better calculated to boost corporate profits," The Economist wrote.
What the magazine added, though, is that mergers – and especially megamergers – are often intractable beasts. That's still true today. The financial incentives and strategies can often be fully justified, but companies are collections of people, and smashing two groups of people together is never easy. Hence the mating camels.
There are also scores of logistical issues to deal with once a deal is approved. Often they seem like dull problems, but when they blow up, they can sink a deal – and a CEO. Just look at what happened with Sobeys and its troubled acquisition of Safeway Canada. One of the root issues: transferring to a new SAP data system that the acquired employees resisted.
Study after study has tried to assess whether mergers and acquisitions are worth it in the long run. One of the best summaries, which reviewed more than 200 research papers, was compiled by Robert Bruner, a professor at the University of Virginia. What he found is that it's an almost impossible topic to tackle because there are so many variables – like the time frame used to measure success.
There are also so many intangibles. How do you value management's time and attention spent on integrating the two companies and account for the opportunity cost of what they could have otherwise done with it?
The professor set out on a mission to answer a simple questions: "Does M&A Pay?" After poring over all of the research, he developed a rather pithy answer: "Does pay, but …" And that "but" is something investors have to seriously consider. The potential problems will look different for every deal, but they better be factored in before shareholders give their blessings.