• Concern grows over shareholder returns amidst a predicted increase in mega-mergers.
• Analysis reveals that three-quarters of acquirers lag behind their sector benchmarks.
• Central banks’ strategies and relaxed antitrust regulations are key factors boosting merger activity.
• Historical data shows that many large deals result in disappointing returns for investors.

LONDON, Jan 17 (Reuters Breakingviews) - As corporate leaders announce significant mergers, anxiety among shareholders begins to escalate, reminiscent of profound failures like the AOL-Time Warner and Bayer-Monsanto deals. The year 2025 is viewed with trepidation as stable interest rates and more lenient antitrust enforcement pave the way for an upturn in substantial mergers and acquisitions (M&A). Historical patterns indicate that acquisitions valued at $10 billion or more often confirm the worst fears of investors, despite a few notable successes. According to data from Reuters, the total mega-deal volume reached approximately $660 billion last year, marking a slight increase from 2023 but still far less than the peaks of over $1 trillion seen in 2019 and 2015.

Over the past five years, major mergers have constituted around 20% of overall deal activity, down from 27% in the preceding decade. With central banks in the United States and Europe reducing borrowing rates, the stage is set for renewed debt-funded deal-making. Buoyant equity markets further foster confidence among corporate executives, with the S&P 500 Index and MSCI All-Country World Index rising by 25% and 18%, respectively, in the past year.

Regulatory bodies also appear set to soften their stances. Andrew Ferguson, nominated by President-elect Donald Trump to lead the Federal Trade Commission, has pledged to abandon the aggressive approach taken by outgoing chair Lina Khan towards mergers. This changed regulatory climate may facilitate large-scale transactions for well-capitalized companies such as Exxon Mobil, Comcast, and Alphabet, further fueling a potentially bustling year for investment bankers.

However, shareholders should brace for less optimistic outcomes based on a comprehensive analysis conducted by Reuters. The study reviewed 60 prominent deals since 2020, encompassing publicly listed acquirers and targets with valuations exceeding $10 billion, inclusive of debt. This examination, starting from Worldline’s acquisition of Ingenico five years ago to ConocoPhillips’s recent $23 billion takeover of Marathon Oil, reveals concerning trends. Out of these significant transactions, roughly 75% of purchasing companies failed to meet the performance benchmarks of their respective sectors, cementing a troubling pattern of underachievement for acquirers across the board.

Across various industries, it appears that CEOs in financial services and healthcare are particularly prone to failure when initiating mega-deals, trailing their sector benchmarks by an average of 9 and 10 percentage points, respectively. Notable examples such as Pfizer’s $43 billion acquisition of Seagen have exemplified this struggle, with Pfizer’s stock lagging behind its industry index by approximately 20 percentage points following the announcement.

On the banking front, the lukewarm reception to mergers, such as the Royal Bank of Canada’s purchase of HSBC Canada and the National Commercial Bank’s deal with Samba Financial, suggests a lack of investor enthusiasm, further heightening concerns about the prospective acquisitions by UniCredit in Italy.

Meanwhile, energy sector transactions have yielded slightly better outcomes, with firms like Chesapeake Energy demonstrating a more favorable performance post-acquisition. However, such successes remain rare. The general pattern reflects the tendency of managers to overoptimize their deal strategies and misjudge the true value propositions, which can lead to disappointing returns for shareholders.

As the megadeal landscape evolves, cautious optimism remains paramount for investors as they navigate the complexities and potential pitfalls of substantial mergers and acquisitions.

For more insights, refer to the original article on Reuters.