Since 2000, a big trend in American business has been domestic consolidation.
In the early 21st century, firms have sought to grow at home in order to reap economies of scale and to dampen competition. Some industries, for example telecoms and airlines, have become far more concentrated as a result. The result has been higher corporate profits, which is why investors have cheered the deal making on. A long-standing rule of thumb is that takeovers usually destroy value for the acquiring company, which overpays. But over the past decade that has not held true in North America.
Since 2008, the share prices of acquirers have outperformed the stock market by a median of 1.1% in the quarter when the deal was announced, according to Willis Towers Watson, a financial firm.
At first glance, it has been business as usual this year. About $1.8 trillion of deals have been announced globally and 53% of them by value have been in North America, according to Mergermarket, an analysis firm. Rather than expanding abroad in an unstable geopolitical environment, American firms have focused on growing at home.
Consider some of the biggest deals. United Technologies’ (UTC) $90bn merger with Raytheon will create a new defense giant. AbbVie is spending $84bn on Allergan, another big drugs firm. Occidental’s purchase of Anadarko will create an energy behemoth. And by buying Caesars, Eldorado Resorts will become a huge player in Las Vegas. Together these firms generate 71% of their revenues within US borders.
Rather than cheering this activity on, however, investors are currently in revolt. As Tara Lachapelle, a commentator at Bloomberg, put it, deals are being “panned instantly.” On the two days after their acquisitions were announced, UTC’s shares fell by 7%, AbbVie’s by 13%, Occidental’s by 9%, and Eldorado’s by 14%. AT&T’s share price has dropped by 12% since it announced the takeover of Time Warner in 2016. This fits a broader pattern of underperformance. Over the past 12 months, North American buyers have had a median share-price drop of 4.2% points relative to the stock market, Willis Towers Watson reckons.
Fashion among investors has shifted away from giant but stodgy firms intent on raising their margins through cost-cutting, towards smaller, loss-making ones with fast revenue growth—hence the current boom in initial public offerings by tech firms.
If investors are one impediment to big deals, antitrust regulators are the other. Over the past two decades, they have been a walkover, but there are signs this is changing. The merger of Sprint and T-Mobile, two mobile-network operators, still awaits approval after a long delay. Even if the Department of Justice gives it the green light, a coalition of state attorneys-general has pledged to fight the deal.
Mergers and acquisitions have come in waves ever since the first frenzy of consolidation in the late 19th century. The past two decades have seen one of the greatest waves ever as executives have sought to build corporate giants with market power over consumers, applauded by investors and enabled by trustbusters. Yet the evidence in 2019 suggests that this long swell is finally subsiding.
