When Anheuser-Busch InBev NV solidified its US$105-billion tie-up with SABMiller plc in November, the deal was pitched as the creation of a “truly global brewer.” AB InBev leader Carlos Brito said the mixture would produce “significant growth opportunities” and generate “enhanced value” for all stakeholders.
We’ve heard that certain before, and it doesn’t always end as nicely as promised.
The quest for SABMiller was largely a wish to get a foothold in developing markets such as Africa, a beautiful supply of growth amid the widespread slowdown in beer consumption. The mixture will be able to produce a billion or two in savings.
But investors need to wonder if AB InBev would be better served purchasing a company such as leading spirits maker Diageo plc, that could provide some much-needed diversification. Or what about a method targeting smaller craft brewers, a segment of the market actually seeing organic growth.
What the offer did was create one massive global brewer that essentially helps make the same beers in various bottles. Growth for growth’s sake.
“I can think of much better methods to spend a hundred billion dollars,” said Michael Hewson, chief market analyst at CMC Markets. “The acquisition is not sensible whatsoever.”
I can consider far better methods to spend a hundred billion dollars. The acquisition makes no sense at all
There is no result in sight for that muddle-along global economy, so it’s understandable that companies and shareholders alike are thirsty for growth. They’re prepared to pay handsomely for it, too.
Call 2015 the entire year from the mega-merger.
Whether it had been Pfizer Inc.’s US$160-billion takeover of Allergan plc, Dow Chemical Co.’s US$130 billion merger with DuPont, InBev’s tie-up with Miller, or smaller yet still-transformational deals like Canadian Pacific Railway Ltd.’s bid for Norfolk Southern Corp. and Suncor Energy Inc.’s attempted takeover of Canadian Oil Sands Ltd. C the world’s biggest companies are answering the call for growth.
The value of deals this year, by Dec. 7, is really a record US$3.9 trillion, based on Mergermarket, which tracks M&A trends around the world. That surpasses the prior peak of US$3.65 billion in 2007. The Dec. 7 total doesn’t include the Dow-Dupont deal, or Newell Rubbermaid Inc.’s US$17 billion buyout of fellow consumer products company Jarden Corp.
To date, there has been as many as six deals that exceeded US$100 billion in value – three of those large deals happened this season.
But growth pursued simply for growth’s sake might not make sense in the long run, deal watchers say, and some of these trillions of dollars might be used a lot more effectively on items like research and development. In other words, many companies are pursuing short-term gains, driven through the lure of cheap money, instead of considering their long-term needs. Along with a measly 25 basis point rate of interest hike in the Federal Reserve isn’t going to do much to prevent this trend.
“What worries me about a few of these deals is that they’re accomplished for the sake of doing something, instead of thinking more creatively,” Hewson said. “If the economy was improving and companies were confident concerning the future, they’d do less M&A and much more R&D.”
The large numbers of share repurchases in 2015 serves as further proof that companies don’t know what to do with all that cash.
Buybacks, which also hit a post-crisis high this season, have done their job to boost earnings per share, but in annually where the S&P 500 is virtually flat, perhaps that money could have been offer better use. Companies that want to purchase the near future, put money into projects that may not make them anything in the short term, but in the long term are accretive.
For now, the world’s biggest companies are still concentrating on deals C more often big ones C even if they don’t make any sense.
Royal Dutch Shell plc’s US$70-billion acquisition of BG Group plc, for instance, was predicated on much higher oil prices. It has passed regulatory scrutiny, however the numbers simply don’t accumulate anymore. Shell will be able to save on costs through things like job cuts and other synergies. But simultaneously, buying of BG Group spreads the company’s risk across a significantly wider marketplace.
It can be done to get too big. Just ask Glencore. Its 2013 merger with mining giant Xstrata was the fifth-largest within the natural resources sector, but the rout in commodity prices isn’t the biggest threat to its existence these days. It’s the US$30-billion debt burden that is a far more pressing concern.
If the economy was improving and firms were confident about the future, they’d do less M&A and much more R&D
“Sometimes you will get too large, then suddenly you receive a huge bout of indigestion,” Hewson said. “That’s what worries me about some of these deals.”
Many deal makers in 2015 avoid worrisome bloated balance sheets by utilizing less debt to finance their deals, instead favouring the inclusion of shares that often trade at lofty valuations. Charter Communications Inc.’s US$77-billion meter as time passes Warner Cable Inc. is one of many examples.
That said, ultra-low rates are an obvious catalyst for surging M&A trends, as they make the price of financing deals very attractive.
Despite the Fed’s first move higher in almost a decade, sluggish U.S. growth, the surging greenback and general malaise in the global economy point to rates staying lower for extended.