Mergers, Acquisitions, and Corporate Restructurings. Gaughan Patrick А.

did not even come close. Bidder shareholder losses exceeded those of target shareholders by $134 billion. However, from the bidder shareholder's perspective, these “offsetting” gains are irrelevant. To consider these gains would be like saying, “Let's pay this large premium for a given target and, sure, we will lose a large amount of money, but we will be giving target shareholders a large gain, at our expense, and from society's perspective, there may be a net gain on this deal.”

Figure 2.8 Yearly Aggregate Dollar Return of Acquiring Firm Shareholders, 1980–2001. Source: Moeller, Sara B., Frederik P. Schlingemann, and René M. Stulz. “Wealth destruction on a massive scale? A study of acquiring-firm returns in the recent merger wave.” Journal of Finance, vol. 60, no. 2 (April 2005).

The number of large losers is striking. Moeller and her colleagues found that there were 87 deals over the period 1998–2001 that lost $1 billion or more for shareholders. Why were the acquirer's losses in the fifth wave as large as they were? One explanation is that managers were more restrained at the beginning and the middle of the fifth wave. They wanted to avoid the mistakes of the prior merger period. However, as the stock market bubble took hold, the lofty stock valuation went to managers' heads. This is evidenced by the dramatically higher P/E ratios that prevailed during this period (Figure 2.9). Managers likely believed they were responsible for the high values their shares had risen to. These hubris-filled executives thought that these high valuations were the product of their managerial expertise rather than the fact that their company, and most of the market, was riding an irrational wave of overvaluation. When such executives proposed deals to their board, they now carried the weight of the management's team “success” record. It is hard for a board to tell a chief executive officer (CEO) his or her merger proposals are unsound when they come from the same CEO who claims responsibility for the highest valuations in the company's history.

Figure 2.9 S&P 500 P/E Ratio: 1990–2014. Source: Standard & Poor's.

Emerging Market Acquirers

A new type of acquirer became more prominent in the fifth merger wave and in the 2000s – the emerging market bidder. Many of these acquiring companies were built through acquisitions of privatized businesses and consolidations of relatively smaller competitors in these emerging markets. Some grew to a substantial size and have targeted large Western companies. One example of this is Mittal, which has used M&As across the world, many of them privatized steel businesses, to become the largest steel company in the world (Table 2.5). Its clout was felt throughout the world in 2006, when it made a successful hostile bid for the second largest steel company – Arcelor. Mittal is but one example of this trend. Another is the Dubai-based Ports World, which in 2006 took over the venerable Peninsular & Oriental Navigation Co. (P&O) in a $6.8 billion acquisition. Still another is the Mumbai-based Tata Group, then led by Ratan N. Tata. The company he created is an international conglomerate that includes not only one of the world's largest sellers of coffee and tea but also luxury hotels, soft drinks, and a telecommunications business. In October 2006, the company acquired the British-owned Corus Group, which made the Tata Group one of the largest steel companies in the world. Later in 2008 the Tata Group acquired the Range Rover and Jaguar brands from the Ford Motor Company as that company fought to become a smaller, less diverse, and profitable enterprise.

Table 2.5 Largest Worldwide Steel Companies: 2004 and 2008 Production

      Sources: Mittal Steel, Paul Glader, “Mittal, Arcelor Clash on Strategy in Takeover Battle,” Wall Street Journal, March 10, 2006, A2 and the World Steel Association.

      The significance of the arrival of large bids from emerging market companies is that the M&A business has now become truly a worldwide phenomenon. While not that long ago most of the large bids came from U.S. bidders, the field has become truly globalized, with large, well-financed bidders coming from not only developed countries but also emerging markets. These emerging market companies have come to establish large worldwide market shares, making them highly credible bidders.

European Protectionism during the 2000s

      Several European nations have difficulty allowing foreign bidders to acquire major national companies. In several instances European nations have stepped in to erect barriers to impede takeovers of national champions. For example, this was the case in 2006, when the French government arranged a hasty marriage between two French utilities, Suez SA and Gaz de France SA, as a way of fending off an unwanted bid from Italian utility Enel SpA. Spain also implemented a new takeover law to try to prevent German E.ON AG's takeover of Spanish utility Endesa SA. The European Commission ruled that Spain violated European merger rules by applying conditions that violated the spirit of these regulations. Many European countries want free markets to allow their own indigenous companies to expand beyond their own borders. At the same time they want the ability to prevent free market access when it comes to hostile bids by other nations. In several instances in the 2000s, nationalism has overpowered the pursuit of free markets.