BREAKINGVIEWS-M&A frenzy sets scene for epic tug-of-war

by Reuters
Wednesday, 3 January 2018 19:46 GMT

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By John Foley

NEW YORK, Jan 3 (Reuters Breakingviews) - The $3.6 trillion of mergers announced in 2017 sets the scene for a gigantic tug of war. Not the commonplace wrangling between buyer and seller, but a tussle between investors, workers and customers over who gets to keep the financial spoils. Politicians are throwing even more sand in the wheels than usual.

A large crop of deals suggests corporate bosses are in high spirits, and keen to take risks. But the traditional claim that acquisitions create only winners is becoming more of a stretch. When giant mature companies combine, they mostly look to raise profitability through job cuts.

Take Walt Disney's $66.1 billion agreement to acquire parts of media rival Twenty-First Century Fox. Though the White House praised the deal as a potential creator of jobs, the market has already indicated that the major beneficiaries are shareholders. The two companies' combined value is $28 billion higher than it would have been had they just tracked the S&P 500 since rumors of their deal surfaced in early November. That's largely down to the $2 billion of annual "efficiencies" the companies have promised.

Insofar as "synergies", "efficiencies" and "adjacencies" are a euphemism for job cuts, 2017's huge merger haul spells trouble. The 10 biggest U.S. transactions to quantify targets in 2017 expected a combined $7.9 billion of annual savings, equivalent to the cost of employing 250,000 American workers at the median wage. Some $3 billion of the proposed savings come from one merger alone: Broadcom's $130 billion offer for rival chipmaker Qualcomm.

Pruning workforces isn't bad in itself. Capitalists might argue that jettisoned workers can be redeployed elsewhere in the economy. But politicians bear the brunt of discontent in the meantime. Giant mergers are, partly for that reason, likely to get more scarce. Acquisitions over $10 billion in size fell by 30 percent in 2017 in the United States. Cross-border deals fell by 10 percent. President Donald Trump's focus on jobs makes giant merger savings a liability.

While big companies tussle over who loses from acquisitions, smaller companies can step in – as they are. The 11 percent rate of growth in U.S. deals under $1 billion in size has been exceeded only once in the past two decades. To the extent that smaller mergers bring less red tape, more value creation and genuine innovation, that's a merger statistic that offers encouragement.

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- Worldwide mergers and acquisitions hit $3.6 trillion in 2017, virtually unchanged from the previous year, and the number of deals was the highest since records began in 1980, according to Thomson Reuters data.

- The largest announced acquisitions were Broadcom's offer for rival chipmaker Qualcomm, at around $130 billion, health insurer Aetna's bid for CVS Health, at $77 billion, and Walt Disney's purchase of parts of Twenty-First Century Fox, at $66.1 billion.

- Although the aggregate value of acquisitions in Europe increased by 17 percent year-on-year, those in the United States fell 16 percent. Cross-border activity fell by one-tenth. The number of U.S. deals increased by 14 percent.

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(Editing by Tom Buerkle and Martin Langfield)

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