Though Cheered by Wall Street, Most Mergers Don’t Work Out for Buyers

Wall Street’s big business — helping companies buy other companies — is hotter than it’s been in years.

When pharmaceuticals giant Actavis said it was buying Allergan Inc. and Halliburton said it would take over rival oil-field servicer Baker Hughes, Wall Street rang up a rare $100 billion deal day that pushed the total value of mergers globally to more than $3.2 trillion for the year, according to banking research firm Dealogic.

The two merger agreements Nov. 17 arrived amid cheers from Wall Street analysts and triumphal statements by executives.

“This acquisition creates the fastest-growing and most dynamic growth pharmaceutical company in global healthcare,” said Actavis Chief Executive Brent Saunders.

Lost in the hubbub: a raft of studies showing that over time, most of the deals will not work out. The buyer, the apparent winner in the deal, will be worse off than before.

“It’s a big risk. You’re willing to pay more for a company than anybody else in the world thought it was worth,” said Mark L. Sirower, author, lecturer and principal at Deloitte Consulting in New York. “You’ve got to do your homework.”

Sirower, a specialist in mergers and acquisitions, is among a number of scholars to compile evidence over several decades showing that, on average, the buyer ends up performing worse financially than its rivals over time.

One study of 302 significant deals, for instance, found that “on average, acquirers underperformed their industry peers in providing returns to shareholders.” Earlier studies showed that as many as 60 percent of all deals turned out poorly for the buyer, with the damage ranging from the marginal to the disastrous.

The data seem counterintuitive, given the hoopla that surrounds most deals. The initial publicity invariably is dominated by the combining firms themselves and their Wall Street matchmakers, which have had plenty of time to polish their sales jobs while deals are being secretly negotiated.

It’s only later that historic flops crop up. Lists of famous mistakes usually start with the massive 2001 all-stock merger of Time Warner Inc. and America Online Inc., originally valued at $164 billion a year earlier. The lists often include the likes of Daimler-Benz’s $40 billion purchase of Chrysler, Sprint Corp.’s $35 billion deal for Nextel Communications Inc. in 2005 and Ebay Inc.’s $2.6 billion purchase of Skype in 2005.

The most recent deal boom is driven by low interest rates, which make it cheap for companies to borrow for acquisitions.

Wall Street’s record may be getting better lately, as a greater percentage of deals reap positive rewards for the buyer. But a merger still is a 50-50 proposition, for the acquirer, at best.

“It’s a cautionary tale,” said Sirower, who lectures at New York University.

Although the effects of deals play out over time, markets generally react instantly to the news, typically sending shares of buying companies down and raising prices on would-be sellers.

And in fact, Sirower and others have found that the market’s first instinct is usually right: Buyers whose stocks fall on a merger announcement usually were underperformers as time went on. That’s just the opposite for buyers whose shares rose the first day and delivered on early promises.

Sirower found that buyers who got off to a bad start and were unable to find the needed synergies posted an average return of -24.9 percent after the first year. Buyers who received a favorable response and managed to stay positive by executing on a well-articulated plan returned an average of 33.1 percent — a huge 58-point difference over the course of the year.

That research bodes well for Actavis.

When it announced its deal for Allergan, its shares rose $4.60, or 1.9 percent, to close at $247.94 for the day. The price largely rose to end last week at $259.75, up 6.5 percent. This week, the stock rose another 4 percent, closing Friday at $270.61.

On the other hand, investors pushed down Halliburton’s shares 5.9 percent to $49.23 on its merger news Nov. 17. The shares kept falling through the following Wednesday, before gaining a bit that Friday to close at $50.63. The shares then lost 16.7 percent this week, closing Friday at $42.20.

In Halliburton’s case, investors were reacting less to concerns about price and more about whether antitrust regulators would approve a deal between the second- and third-largest oil-field service companies. The deal may in the end work for Halliburton.

But the odds are against it.