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And the Winner for the Worst Corporate Deal Is Bayer

Some credit Bayer AG (XTER: BAYN) with making the worst corporate deal in recent memory. With a market cap of about $62 billion, the German conglomerate's value is below what it paid for Monsanto last year. Even Houdini would have a difficult time making the entire worth of a company disappear.

The deal ranks right up there with AOL's merger with Time Warner and Bank of America Corporation's (BAC) purchase of Countrywide, according to an August article in The Wall Street Journal.

With the Monsanto takeover, Bayer inherited a host of costly lawsuits over the Roundup weed killer. Bayer CEO Werner Baumann thought the problem wouldn't impede the company's ability to pump more money into its pharmaceutical business, the recent driver of its growth, according to an article in FiercePharma. Those plans have been waylaid by the company's buyout related debt load.

Bayer's inability to make any pharma deals will leave a gaping hole when best sellers Xarelto and Eylea lose patent protection in 2023.

A better deal

At the other end of the spectrum is AbbVie's (ABBV) $63 billion June takeover of Allergan.

At first the buyout wasn't viewed favorably. Analysts thought it wasn't a good match, and that AbbVie was forced to make a deal to compensate for the sales hit it will take when its blockbuster Humira starts feeling the impact of competition in 2023.

But SVB Leerink analyst Geoffrey Porge thought otherwise. He liked the arrangement. In a late July article, FiercePharma reported that Porge put out a report emphasizing that AbbVie and Allergan will generate more synergies than first anticipated. He thinks the deal will eventually prove to be a smarter move than Bristol-Myers Squibb's (BMY) $74 billion buyout of Celgene (CELG) and Takeda's (TAK) $63 billion purchase of Shire.

Porge's enthusiasm is based on the addition of a new therapeutic area--aesthetics--to the AbbVie portfolio. On the other hand, Bristol-Myers and Takeda won't be acquiring anything different from what they already have.

In Porges' opinion, the Bristol-Myers and Takeda acquisitions are unlikely to benefit the companies' shareholders. He thinks deals like these--with values of over $50 billion including net debt--could hurt the buyers' share prices. He likes deals that are under the $50 billion threshold.

The statistics bear this out. Among more than 160 biopharma M&A transactions that were made public since 2009, those worth more than $50 billion saw the acquirers' share price drop more than 15% on average three months after the deal announcement. By that same three-month mark, mean and median share prices among companies who made smaller deals had increased.

The three pharma companies that emerged as winners when it came to delivering the best post-transaction share price performance were Bayer (surprise!), Gilead Sciences (GILD) and Eli Lilly (LLY). Their share prices increased 2% to 5% on average over the 10 days after deal announcements.

Disclosure: The author has positions in Bristol-Myers Squibb, Gilead and Eli Lilly.

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This article first appeared on GuruFocus.