Investors Fall Out of Love With Deals
"Wall Street is desperate for revenue as evidenced by the recent prices of Goldman Sachs and Morgan Stanley ,not to mention the many companies that went out of business.
When one combines the lack of interest in junk bond financing in M and A deals (bonds with 10% yields not selling), and the prices of acquirers getting punished, this last leg of profitability has severely diminished . Caveat Emptor."
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Investors Fall Out of Love With Deals
The stocks of a number of acquirers have suffered big losses following the announcement of a takeover
Corporate executives earlier this year were feeling the love from investors when they announced acquisitions. Now, some buyers are getting burned.
On Monday, pipeline operator Energy Transfer Equity LP’s sharesfell nearly 13% on news of its $32.6 billion deal to take over rivalWilliams Cos., making it the latest acquirer in the past few months to suffer a big stock selloff on deal news. Others include health insurer Centene Corp., index provider McGraw Hill Financial Inc.and chip maker Dialog Semiconductor PLC.
The rebukes represent a reversal of an important driver of the mergers-and-acquisitions boom over the past few years, namely a surge in the stock prices of companies announcing acquisitions. Those rising prices had the twin effect of emboldening other buyers and boosting the value of shares that are often used as currency. Should investors continue to punish acquirers, they could add to threats gathering over an M&A market that is running at a near-record pace.
Since July 1, acquirers’ share prices fell 0.6% on average on the first day of trading following the announcement of an M&A deal over $1 billion, according to data provider Dealogic. That would be the first quarterly decline in three years and follows increases of 4% and 5.4% in the first and second quarters, respectively.
XPO Logistics Inc. is one company that has found itself on both ends of the spectrum. Its shares rose 15% in April the day after the company announced its largest purchase ever, the $3.5 billion takeover of French trucking firm Norbert Dentressangle SA.
The follow-up act landed with a thud. When XPO announced a $3 billion deal for trucking firm Con-way Inc. on Sept. 9, its stock fell 13%. The slide has continued, with shares down 37% since then.
XPO Chief Executive Bradley Jacobs, who has built XPO largely through acquisitions, said he was puzzled by how investors reacted to the Con-way deal, which he expects to boost XPO’s per-share profit within a year. “Of all the acquisitions I’ve done in my career, I’m most excited about Con-way,” he said in an interview. “I’m confident that, over time, the investment community will see the value.”
The primary culprit for buyers’ stock skids is the recent market volatility, bankers and executives said. Indeed, many of the steepest share drops came as markets whipped around earlier this month, causing investors to sell holdings that appear risky, like companies making big bets on acquisitions.
Some acquirers are still getting a warm reception. Anheuser-Busch InBev NV’s stock gained more than 6% one day this month on news that it had approached SABMillerPLC to propose a deal that would unite the world’s two biggest brewers by market share.
But investors are getting choosier. Should that continue, it could slow what has been a banner stretch for deals and, by extension, M&A fees for investment banks. Companies have struck about $3.2 trillion of mergers this year, a pace that would roughly match the record set in 2007, according to Dealogic.
“Volatility is never a friend of M&A,” said Gregg Lemkau, co-head of global M&A at Goldman Sachs Group Inc. “If that persists for an extended period of time, people may start to get more anxious.”
A longer-term shift in investors’ attitude could be particularly punishing to companies like XPO that lean heavily on takeovers for growth. To avoid overborrowing, these firms, which also include several pharmaceutical companies, often use their stock to pay for acquisitions.
Investors have become less accommodating of deals in other ways, too. They balked last week at the terms of two bond sales backing a pair of large recent acquisitions, cable operator Altice NV’s purchase of Cablevision Systems Corp. and chemical company Olin Corp.’s takeover of Dow Chemical Co.’s chlorine-products unit. The bonds ended up being more expensive and raising less cash than the companies had hoped.
Should bond and stock investors lose their lust for M&A deals, buyers could find their financing options limited.
Historically, acquirer share-price declines were the norm. The average buyer’s stock fell most years from 1996 through 2011 as investors cast a wary eye on the risks that come with trying to integrate workforces and systems, retain customers and blend cultures.
They have risen at least 1.4% each year since then, as shareholders began to reward companies using their cash to pursue growth in a sluggish economic environment and as buyers promised to deliver quick profits.
But that old skepticism may be creeping back, in part, analysts said, because some of the worst deals in history were done near the peak of an M&A cycle.
MPLX LP, a publicly traded unit of Marathon Petroleum Corp., dropped 15% the day in July that it announced a $15.8 billion deal for pipeline operator MarkWest Energy Partners LP. Television broadcaster Media General Inc. lost 6% on news this month of its takeover of magazine publisher Meredith Corp. The worst tumble belongs to Dialog Semiconductor, which lost 19% one day last week after it announced a $4.6 billion purchase of rival chip maker AtmelCorp.
“Investors have been messaging to CEOs, ‘Please be disciplined with your capital,’ ” said Chris Bartel, head of global equity research at Fidelity Investments. “We’ve all lived through cycles where companies paid too much or acquired businesses that really weren’t helpful to earnings growth.”
Stock slides can also help put buyers in play. Media General’s decline helped open the door for Nexstar Broadcasting Group Inc. to make an unsolicited takeover bid for the company on Monday. Nexstar’s stock ended the day down 2.3%, compared with a 2.6% drop in the S&P 500.
—Dana Cimilluca
contributed to this article.
contributed to this article.
Write to Liz Hoffman at liz.hoffman@wsj.com
