CEOs just can’t seal the deal anymore.
I say that because the number of so-called withdrawn mergers and acquisitions—meaning proposed takeovers falling through—has soared to a record high, and we’re not even halfway through the year yet. According to Dealogic, the dollar amount of busted deals hit $401 billion through June 1, easily exceeding the previous annual record of $362 billion in 2014.
You want names? How about Pfizer calling off its $150 billion bid for Allergan, the failed $35 billion hook up between Halliburton and Baker Hughes, the torpedoed Honeywell $90 billion takeover of United Technologies. The list goes on and on.
There are a number of factors behind all this deal interruptus. Yes, it’s true that regulators in a Democratic administration may be more aggressive than their GOP counterparts, but that wouldn’t explain why the number of broken deals was much lower during most of Obama’s other eight years in office. No, in fact, I see three other reasons why deals are falling through at a record rate, and to me it all reflects a rather unhealthy environment, despite what some saw as a positive setting for M&A this year.
One: There are very few businesses —particularly mature ones — capable of generating double-digit, or even high single-digit, growth. Buying a company at the right price might provide that, but the number of failed deals suggests that some executives, desperate to buy earnings growth, are chasing after targets that, oops, maybe aren’t such a good fit.
Two: And speaking of desperate, Wall Street bankers are emanating more than a trace of that too. Business is dismal across the board on Wall Street, which means that fee hungry M&A bankers—feeling ever more pressure from their bosses—are proposing all manner of hair-brained deals to corporate executives. These bankers, aka salesmen, can be a persuasive lot, and unfortunately they sometimes manage to convince CEOs to try to do a deal they shouldn’t.
Three: And then there are taxes. And why in the world should our company pay any of those, some CEOs seem to be wondering. I’m talking about tax inversions of course. (Hello Pfizer/Allegan.) I remember way back when I went to business school, it must have been the second week of my corporate finance class, when my professor said it was a bad idea to have tax considerations drive corporate strategy. For decades this was a given in American business. Sadly, it’s a lesson that has been unlearned in the executive suite.
Stay tuned for more blown deals too: Bayer-Monsanto may fall through, ditto AB InBev-SAB Miller.
The only positive in all this is that it’s probably better these bad deals died on the front end rather than after they’ve been consummated when billions of dollars of shareholder wealth gets destroyed and thousands lose their jobs. (Take it from me as someone who survived what has been called the worst deal in history, the Time Warner/AOL merger, as both an employee and shareholder.)
There’s real truth to that old chestnut: Sometimes the best deal is the one you don’t do.
