M&A shows symptoms of overheating

June 9, 2014

By Robert Cyran and Kevin Allison

The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

The merger market is showing symptoms of overheating. Global deal volume is up sharply this year – up 63 percent according to Bernstein research and 71 percent by Thomson Reuters’ tally. Monday’s announcements, meanwhile, hint at toppiness.

Merck is paying a 239 percent premium for Idenix, valuing the biotech at $3.9 billion. The justification is largely based on optimistic revenue synergies. The pharmaceutical giant thinks it can boost sales by adding the biotech’s drug into its offerings, creating a more powerful cocktail. Rival Gilead Sciences pulled off a similar “plug and pray” acquisition three years ago. But Idenix’s hepatitis C drugs have yet to hit the market and the category has been plagued with clinical trial failures. The sky-high premium means the seller is walking away with the benefit of the doubt – and then some.

Public bidding wars are another sign of froth. Tyson Foods and Pilgrim’s Pride both saw their stocks initially rise as they circled sausage and ham producer Hillshire Brands. Tyson’s latest $8.5 billion bid, which seems to have clinched the deal, represents a 70 percent premium over Hillshire’s undisturbed price. At $63 a share, it’s above the $60 maximum at which a Breakingviews analysis suggested an acquirer would be giving away more than potential synergies are worth.

Worldwide, companies are sitting on about $7.5 trillion of cash, according to Thomson Reuters. With organic top line growth hard to come by in sluggish economies, many are turning to acquisitions.

In the past year, investors have mostly applauded. About three-quarters of acquirers in the United States have seen their stock rise following announcement of deals bigger than $1 billion, against about half over the longer term. Analog Devices’ 6 percent surge in market value on Monday after it said it was buying Hittite Microwave for $2.5 billion is a case in point.

Yet rising stock markets mean bargains are increasingly scarce. High premiums like Merck’s for Idenix compound the problem, as do pricey auction victories. Animal spirits are starting to run rampant. Investors who are still boosting buyers’ shares may come to regret it.

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