“More value is destroyed by acquisitions than any other single action taken by companies,” said corporate finance and equity valuation guru Aswath Damodaran. But the same thing has been said by many others and for many years.
Shareholder value
Research shows that in the the first two years or so, value more often accrues to the shareholders of the selling company than those of the purchaser. The longer-term picture is trickier, but it’s reckoned that in up to two-thirds of cases directors fail to achieve the benefits originally targeted from the acquisition.
Big deals, especially, can be spectacularly value-destructive. Vodafone‘s £112bn takeover of Mannesmann, Royal Bank of Scotland’s €71bn acquisition of ABN Amro and Rio Tinto’s $38bn purchase of Alcan are three mega-fails that spring to mind.
Director over-confidence, the wrong deal at the wrong time, the right deal at the wrong price, due diligence failures, insufficient planning or poor execution. So many things can leave shareholders regretting they were persuaded by their board that the acquisition was a good idea.
So what are the prospects for deal-doers du jour Royal Dutch Shell (LSE: RDSB), BT Group (LSE: BT-A) and J Sainsbury (LSE: SBRY)?
Right deal, right time
Shell’s BG buy has a clear and understandable rationale. The company becomes the world’s top liquefied natural gas trader, and a major deepwater oil producer (replenishing its reserves). This takeover has been touted as a good idea for years, and I like that Shell chose to strike during the oil slump. Some of the most value-destructive acquisitions are made when an industry is at the peak of a boom.
Shell’s dividend (current yield 7.2%) could be at risk if oil’s recent recovery goes into reverse for a prolonged period, but I think the company has tried to do the right deal at the right time. And the early signs are promising, with management already having upped its guidance on some of the benefits it expects the acquisition to deliver.
Decisive move
BT has seen that the future is quad-play packages of broadband, TV, phone and mobile, and has been decisive and aggressive to position itself as a major player here. As with Shell, the strategic rationale for BT’s acquisition of EE is clear.
As to the nuts and bolts of valuation and benefits, master investor BT shareholder Neil Woodford said he and his team spent some time examining the acquisition, before concluding that the deal could indeed deliver long-term shareholder value. If so, a current forward P/E of 14 and a 3.7% dividend yield would appear to be attractive.
Inspired or misguided?
Sainsbury’s seems to have won over most City analysts with its shareholder-value claims for its surprise acquisition of Argos-owner Home Retail (awaiting competition authority approval), but it still strikes me as an unnatural fit. The rationale is many-faceted and appears convoluted and complex to execute in my eyes. It could prove to be a stroke of genius in a sector undergoing major structural change, or a misguided folly.
A big disconnect between Sainsbury’s next-year forecast P/E of 11.2 and Tesco‘s 17.6 and Morrisons‘ 16.8 may indicate the market also has concerns about the wisdom of the deal.
Statistically at least one of the three companies here will end destroy rather than enhance shareholder value. But how many of us sell our shares when a company makes a big acquisition, and how many of us simply cross our fingers and hope that ‘our board’ has pulled off a masterstroke?
