A Tale Of Two Takeovers Highlights Deal Dilemmas

May 8 2014, 3:31pm CDT | by

The mergers and acquisitions market has finally reopened after the financial crisis – but the nature of the deals that are emerging suggests that not all of this activity is based on sound business reasoning.

According to Reuters, M&A activity in the first quarter was 54% higher than in the same period in 2013, at $710 billion. However, the number of deals is 14% lower, highlighting the fact that the market is being driven by a smaller number of bigger deals, including bid battles for Time Warner Cable (which Comcast bought for $70 billion after seeing off a rival bid from Charter Communications) and French telecoms group SFR (where Numericable saw off Bouygues to buy the mobile operator from Vivendi for €13.5 billion).

This trend for mega-deals has continued into the second quarter but has also taken on a trans-Atlantic element, with pharma giant Pfizer bidding for Anglo-Swedish rival AstraZeneca and GE seeking to buy its French counterpart Alstom – although the US company faces a counterbid from its German rival Siemens.

The Pfizer/AstraZeneca deal is the latest of a spate of healthcare bids, including a complex asset swap between GlaxoSmithKline and Novartis, and bids by Valeant for Allergan and by Actavis for Forest Laboratories.

According to KPMG’s 2014 M&A Outlook, the rebound in deals is the result of companies having large cash reserves and access to cheap credit, opportunities in emerging markets and an improvement to consumer confidence.

The cross-border deals illustrate, in part, the relative weakness of European companies scarred by the Eurozone crisis – GE’s bid for Alstom, in particular, seems like a good fit strategically.

But Pfizer’s bid strikes many as opportunistic, with a number of analysts saying it is motivated more by AstraZeneca’s UK listing, which would give Pfizer a 21% tax rate rather than the US’s 33% rate and make it easier for it to spend its foreign earnings, than by any strategic imperative. It is not alone – a number of US companies appear to be looking to buy foreign rivals using cash that they have sitting offshore rather than pay tax on it in the US. The ultimate expression of the weirdness of this situation was not actually a merger at all, but a share buyback by Apple.

Few commentators seemed to think it unusual that a company with approaching $200 billion of cash on its balance sheet – $150 million of it held abroad – should choose to raise a further $17 billion in a bond issue to help pay for an increase in its dividend payout and share buyback programme. In other words, one of the world’s richest companies borrowed money from one set of investors in order to give it to another. You can see why Apple did it – why wouldn’t you if you can get away with it – but on so many levels, it makes no sense.

American tax rules on earnings outside the US are not only costing the country billions of dollars in lost tax revenues but are also driving market activity whose main rationale is to avoid paying that tax. As we’ve seen with companies such as Starbucks and Amazon, there are reputational dangers to doing this for the companies involved – and it is surely only a matter of time before the US changes its rules.

GE’s bid for Alstom and Pfizer’s attempt to buy AstraZeneca highlight another risk – government interference in the bidding process. The French government guards its national champions jealously and there is a strong strand of anti-American sentiment in the current government that is reinforcing its natural reluctance to let foreigners buy French companies – the government once scuppered a takeover of yoghurt maker Danone by PepsiCo on the grounds that it was “strategic” to the French economy.

It has been reported that Siemens was encouraged to mount a counter-bid to GE’s offer by some pretty heavy prompting from French industry minister Arnaud Montebourg even though a Franco-German tie-up looks less logical from a business perspective.

Meanwhile, while the UK government started out being strongly supportive of Pfizer’s bid for AstraZeneca, the opposition Labour party has raised concerns about how beneficial the deal would be for the UK, mindful of the fact that Pfizer shut down a research facility three years ago with the loss of 1,000 jobs. The Swedish finance minister Anders Borg also spoke out about his country’s experience of dealing with Pfizer. This has forced the government to temper its enthusiasm and demand guarantees from the US company that it will maintain a research and development presence in the UK – guarantees that, ironically, could threaten AstraZeneca’s Swedish research facility.

There have long been suspicions that most mergers are more about empire-building, keeping bankers busy and boosting managers’ pay packets than about creating true business value and null . As the Economist pointed out last week, “optimists hope this is a sign of bosses daring to be bold because of improving economic prospects. Sceptics wonder if the managers are in fact doing deals to conceal a worrying lack of growth opportunities—or just cutting costs by merging with companies in kinder tax jurisdictions.”


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