By Matthew Lynn
LONDON (MarketWatch) -- It was a bad day for the City of London. The bankers of the Square Mile had been looking forward to a mega payday courtesy of the American drugs giants Pfizer. Its planned $120 billion takeover of its British rival AstraZeneca promised to deliver the kind of bonanza of fees that keep Christmas bonuses looking healthy.
Now, the gravy train has hit the buffers. Pfizer (PFE) has made a series of escalating offers but the Astra (AZN) board has sent them packing. No doubt Pfizer has made discreet soundings about the possibility of launching a full-scale hostile bid, and been warned that it is not going to work. While a few of the investors in Astra wanted to take Pfizer's cash, most appear to have decided the arguments for the merger don't stack up.
That is bad news for the deal-makers. But it is good for the wider markets.
True, Pfizer's argument for the deal were particularly dismal. But it is a signal that investors might no longer fall for the snake oil sold by M&A bankers. Mega-mergers have a record of achieving only one thing -- lucrative fees for the advisers and dismal returns for shareholders. The more regularly they fail, the healthier the market will be.
Traditionally, the one thing the City of London and Wall Street both love is a mega-bid. Pfizer's proposed takeover of AstraZeneca -- at a proposed $120 billion -- would have ranked among the biggest cross-border takeovers of all time. For the bankers, and the armies of lawyers, PR firms and consultants who advised on those deals, it could have generated literally hundreds of millions.
How much? When Kraft (KRFT) took over the chocolate manufacturer Cadbury in 2010, it cost an eye-watering GBP420 million in advisory fees. If the Pfizer offer had been accepted, the fees would have come to around GBP345 million, assuming they were set at 0.5% of the merger's value. If the bid was as complex as the takeover of Cadbury, and ended up going hostile, they could have risen above GBP1 billion.
In the past, the fund managers who control the shares of most large companies would have accepted that. It was expensive, but the big premium a company such as Pfizer was willing to pay juiced up their quarterly performance figures. Few of them minded about the costs, partly because they often worked for the same banks that were charging huge fees -- and even if they didn't, they were part of the same club.
The snag was almost all mergers destroy value. Through the M&A booms of the 1980s, the 1990s, the 2000's, all the evidence suggested that takeovers made companies worse not better.
Time Warner (TWX) was no better for its merger with AOL. Vodafone (VODPF) was hardly improved by its acquisition of Germany's Mannesmann. Daimler (DDAIY) was not a better car manufacturer after it bought Chrysler.
While there may be the very occasional success story, most mergers ended in failure -- and many have had to be dismantled even more expensively than they were put together.
There was no credible evidence to suggest companies became more competitive or profitable after a takeover. Most just got bigger, more bureaucratic and in the end flabbier. What was interesting about the Pfizer offer for AstraZeneca was that shareholders finally appear to have rumbled that.
It is not as if the American company was not being generous. Before the proposed deal was announced, AstraZeneca shares were trading at GBP37 and had been stuck around that level for the past year. Pfizer was willing to offer GBP55 a share, a premium of more than 50% over what they were worth six months ago -- and will probably be worth in six months time.
It was putting plenty of its cash on the table.
The problem was that its arguments were dismal. It couldn't come up with any better motive for the takeover than some tax savings from switching its domicile from the U.S. to the U.K., plus some cost savings from cutting stuff and minimizing the spend on R&D.
It hardly helped that Pfizer had already been through some big mergers -- the takeover of Warner-Lambert, for example -- without getting any stronger. Shareholders would have got some cash, but not much else.
In the past, they might have pressured AstraZeneca to accept. A few expressed disappointment the deal didn't go through. Most however seem happy to see it fail. We can be sure that Pfizer would have taken discreet soundings, and if it could have been assured of success with a hostile bid would have launched one.
The top of any bull market is usually marked by a frenzy of M&A deals. It happened in the 1990s, and the 2000's before the crash. And there are signs of it happening now. AT&T (T) is buying DirecTV (DTV) . Facebook (FB) has bought WhatsApp.
But one or two flopped mergers -- like Pfizer's -- could kill that stone dead. Pfizer will have spent millions on its bid, and its failure it will have cost the company its credibility. CEOs are not going to launch many more if they are going to wind up looking stupid.
In the short term, that will be bad for investors. Big deals juice up the market, and send it higher. They create the froth on the top of a bull market -- and that froth can be profitable.
In the medium term, they will be better off, however. Why? Because most big deals destroy value, siphoning hundreds of millions into the pockets of the bankers, but leaving companies weaker and their shareholders poorer.
Unless you happen to be smart enough to spot which companies are going to be bid for and get into the stock just before it happens, most investors are better off with a stock market made up of reasonably well-managed companies growing their business steadily if not spectacularly.
AstraZeneca's shareholders appear to have realized that. If a few more bids fail, it is possible -- just possible -- that this bull market won't be finished off by a series of value-destroying mega-deals. And that surely will be a good thing.
Also read these essential MarketWatch stories:
The most overvalued market in the world? France
-Matthew Lynn; 415-439-6400; AskNewswires@dowjones.com
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05-21-14 0401ETCopyright (c) 2014 Dow Jones & Company, Inc.
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