By GRETCHEN MORGENSON SEPT. 16, 2016
If the deal goes through, Monsanto’s executives and shareholders will receive a 44 percent premium to their company’s stock price on Wednesday, before Bayer sweetened its offer. The companies’ bankers and deal advisers will also reap rich rewards in the deal, which will create a global pharmaceuticals, health care and pesticides behemoth.History suggests, however, that one group should be wary of the transaction: Bayer’s stockholders.......That’s the message in a new and comprehensive analysis by the S&P Global Market Intelligence team. “Mergers & Acquisitions: The Good, the Bad, and the Ugly (and How to Tell Them Apart),” by Richard Tortoriello and a group of analysts, found that among Russell 3000 companies making significant acquisitions, post-deal returns generally under performed those of their peers.“Despite the often-heard claim of M&A synergies,” the report said, “acquirers lag industry peers on a variety of fundamental metrics for an extended period following an acquisition. Profit margins, earnings growth and return on capital all decline relative to peers, while interest expense rises, as debt soars, and other ‘special charges’ increase.”.....Timing, he speculated, is one reason for the poor performance. “Mergers and acquisitions really heat up at the top of the market when business prospects going forward aren’t as good,” he said. “Then it cools down when the market falls, just when you’d want to be buying stocks and companies.”......But precious few executives seeking to juice their earnings via acquisitions will get what they wished for. The average acquisition, the S&P Global study concluded, “tends to be dilutive to earnings growth over an extended period.”
Other performance metrics — returns on both equity and invested capital — also declined as acquirers compared with their industry peers. This is partly a result of increased interest expense and other charges. And when looking at return on invested capital, many post merger companies struggled under the weight of their increased debt loads........Another aspect of failing deals: Those using stock as buyout currency under perform those deploying cash, as Bayer is doing with Monsanto. And the larger the stock acquisition, the more likely it is to under perform significantly, the study found. Acquirers using the highest percentage of stock under perform industry peers by 3.3 percent one year after the deal is done and by 8.1 percent after three years.