Thursday, July 2, 2015

Merger Waves: Pharma, Telecom and the Scramble for Position

We've talked about merger waves many times in these posts.  In general, some catalyst produces shocks in an industry and creates opportunities (and sometimes necessities) for consolidation.  The shock can be a change in technology, consumer tastes, regulation or any other shock that alters the costs or benefits of acquisition.  

In the current environment, Telecom and Pharma represent merger waves with multiple parties scrambling for position.  Let's consider Pharma: The Pharma wave has been under way for quite some time.  As far back as 2009 we saw the mergers of Merck/Schering-Plough, Pfizer/Wyeth and Roche/Genetech.  We continue today with deals by players such as Sun Pharmaceuticals and Bayer.
Among the catalysts for Pharma are the exploration of patents as companies search for new sources of growth, and the realization that some of the large R&D expenditures of the past haven't paid off.

For Telecom the catalysts include deregulation and dramatic changes in technology including increased use (and uses) of hand held devices, tablets, and smart phones.

As rivals combine, the competitive landscape in any industry changes and firms scramble to maintain viability.  In today's market many deals in Pharma and elsewhere remind some of the heyday of 2007 with high multiples as too many bidders search for too few deals.  

Indeed, there is empirical support for different valuations at different stages of a merger cycle.  Harford (2005), for example, notes that bids later in a wave cycle are associated with lower returns.  This makes practical sense as well - when a catalyst makes various firms attractive, the low hanging fruit is the first to be acquired.  As attractive targets become scarce, bid prices rise and acquiring returns decline.

Some experts appear unconcerned about the current high multiples, but as Joe has said many times, when they start telling you "this time is different" grab your wallet!  While good deals remain, acquirers must be careful to assess risk and return objectively and only make those deals that are value additive and consistent with a firm's strategy.  It is important to beware of behavioral biases especially when deals are occurring quickly all around you.  Nevertheless,  while markets are efficient, deal makers are human.  Tread carefully,

All the best,


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