THE ECONOMIST: Will the mega-merger wave wipe out shareholder value?

Owing to popular demand from hubristic chief executives, “merger Mondays” are back: ten times this year the workweek kicked off with news of at least one corporate combination worth $US10 billion ($15b) or more.

So are merger Tuesdays, Wednesdays, Thursdays and Fridays, brought to you by big business’ record profits, lower interest rates and newly friendly trustbusters.

Union Pacific’s $US85 billion purchase of Norfolk Southern, which needs approval from American railway regulators, is the largest takeover anywhere in the world since United Technologies picked up Raytheon in 2019 for $US90 billion to create a defence-industrial giant renamed RTX.

Netflix, Comcast and Paramount Skydance are in a $US60 billion bidding battle for Warner Bros Discovery, the fiercest in Hollywood since Disney paid $US71 billion for 21st Century Fox, also in 2019.

Samsung Electronics has set up a mergers-and-acquisitions (M&A) unit which can tap the South Korean technology giant’s $US74 billion war chest of cash to help it succeed in the AI age.

Fully 32 corporate mega-deals, worth $US700 billion in total, have been announced in 2025. With nearly a month to go, this is already the most on both measures since the post-pandemic frenzy in 2021.

LSEG, a financial-data provider, counts 63 $US10 billion-plus transactions around the world from January to November, including buy-outs of the same size — higher than for any full year in its annals going back to the 1970s.

Today’s acquisitive chief executives are undeterred by yesterday’s cautionary tales. All agree that AOL’s disastrous $US182 billion takeover of Time Warner, announced months before the internet bubble popped in early 2000, was tragically mistimed and comically mispriced.

All are familiar with the subgenre of management research where “study after study puts the failure rate of mergers and acquisitions somewhere between 70 per cent and 90 per cent,” as Clayton Christensen, one of the past half-century’s most admired management scholars, and colleagues concluded in 2011.

Each boss firmly believes that he (almost always a man) belongs to the 10-30 per cent.

Chief executives are, constitutionally, a self-confident bunch liable to put the mega in megalomania. But how nervous should their latest merger-lust be making shareholders?

Start with the statistics. The world has changed since Christensen’s admonition a decade and a half ago. Perhaps firms’ M&A record has changed, too? To find out, Schumpeter examined all completed corporate mergers worth $US10 billion or more (including debt and not adjusted for inflation) announced between the start of 2010 and the end of November 2020.

In all, 117 megadeals were struck in that time for which data were available to assess the buyers’ subsequent five-year financial performance. The deals were collectively valued at $US2.7 trillion, mostly involved American firms and included their share of heart-stoppers.

In 2016 AB InBev gulped down SABMiller, a smaller brewer, for $US103 billion. Two years later AT&T forked out $US85 billion for Time Warner (which had rid itself of AOL in 2009). The year after that Bristol-Myers Squibb, a pharma giant, popped Celgene for $US79 billion.

In the five years following a deal the median buyer’s revenue and operating profit grew at an annual rate of 6 per cent, decent but not extraordinary.

The ratio of its market capitalisation to the book value of its assets, a common valuation measure, was flat. Its return on capital, a measure of profitability, declined by two percentage points.

This resulted in a mixed bag for shareholders. Half the suitors in the sample outmatched their industry in the five years after a deal’s announcement.

Their collective excess shareholder returns, above their industry’s benchmark index, added up to $US2.8 trillion. Even once you exclude the $US640 billion rise in Microsoft’s market value after it bought LinkedIn in 2016, which probably had little to do with its $US26 billion purchase of the professional self-promotion engine, the figure is a still impressive $US2.2 trillion.

However, the half that underperformed their peers did so just as impressively, to the tune of $US2.9 trillion. In short, failure these days is not as common as Christensen once warned, even if the odds of success still appear no better than a coin toss.

More systematic research shows that companies have indeed been getting less bad at combining. Last year Bain, a consultancy, went so far as to publish a report entitled “How companies got so good at M&A”.

The answer, it found, was that practice makes perfect. Between 2012 and 2022 firms which had bagged at least one acquisition a year averaged annual shareholder returns of 8.5 per cent.

M&A-incurious companies eked out 3.7 per cent. Between 2000 and 2010 the serial acquirers’ advantage was less than half that.

Suzanne Kumar of Bain, one of the report’s co-authors, attributes this to several factors: more diligent due diligence; greater focus on new capabilities or adjacent markets rather than merely greater scale in a buyer’s core business; and picking many smaller deals over one make-or-break wager.

Tie-ups and downs

Half of this year’s mega-mergers are still bets on scale rather than scope. Many are large — in absolute terms, obviously, but also relative to the buyer’s size.

The median deal is equivalent to 46 per cent of the suitor’s market value. Union Pacific is paying two-thirds of its market capitalisation for Norfolk Southern. As a takeover target, Warner Bros Discovery is worth four Paramount Skydances.

In such cases due diligence is, well, paramount. All the more so at a time of profound technological change.

Boards should think twice before splurging tens of billions of dollars on a tie-up when AI could soon be helping firms cut costs and, in time, perhaps even raise revenues — the two usual justifications for bet-the-farm M&A. And they should remember that though better than one to nine, those 50-50 odds are still a toss-up.