A potential Pfizer-Allergan merger (value: at least $120 billion) and a potential Visa-Visa Europe merger (value: $22 billion), both reported yesterday, could extend the already mind-blowing string of 2015 deals – capped for the moment by the $117-billon acquisition of SABMiller by Carlos Brito’s Anheuser-Busch InBev. These deals represent the highest of high finance, and it’s tempting to regard them as primarily exercises in Olympic-caliber number crunching and negotiating. But they’re mainly something else. They are ultimately tests of judgment and leadership, and their lessons hold value for all leaders, even those who will never have to decide whether to spend $100 billion.
These deals are far more than mere financial exercises because they force the CEO of the buying company to confront reality fearlessly, to examine his or her own biases, and to question his or her motivations. It all comes down to the price. The main reasons some mergers fail isn’t strategic mismatch or poor integration, though those factors can play big roles; it’s usually because the buyer pays too much. When that happens, the buying CEO has betrayed his or her shareholders by wasting their capital in a deal that cannot create value for them. And overpaying is extremely easy to do.
Investment bankers, who stand to make millions if a deal closes, paint an alluring picture of competitive dominance and personal glory for the potential buyer. The combination will create lucrative synergies and opportunities for cross-selling, the argument usually goes, and enable massive cost savings and economies of scale. And you, Mr. or Ms. CEO, will be remembered as the transformative visionary who made it all happen.
The trouble begins with the fact that the selling CEO can usually calculate the potential synergies and cost savings just as well as the buyer can, so those benefits get bargained away in the price negotiation. Cross-selling is notoriously hard to implement. Synergies – one plus one equals three – are usually a fantasy; it’s tough enough just to make one plus one equal two. To the buying CEO, the negotiation, sometimes involving a rival bidder, becomes a matter of personal victory or defeat.
For an especially lurid example of how badly it can all turn out, look back a decade at Boston Scientific’s fight with Johnson & Johnson to buy Guidant, a medical device maker. Boston Scientific became so obsessed with “winning” that it agreed to an insanely high price ($27 billion, or 52 times earnings) and ironclad terms that left it no outs regardless of what might happen during the months required to close the deal. J&J chief Bill Weldon was happy to drop out of the bidding, confident that Boston Scientific would lose by winning. Which it did. Though the S&P is up 65% since then, Boston Scientific’s share price still hasn’t recovered.
Have any of this year’s mega-buyers fallen into the same trap? Brito had to raise his bid for SABMiller three times. We don’t yet know how much Pfizer’s Ian Read may be willing to pay for Allergan or whether Visa’s Charles Scharf has made a sound deal. We just know they are being tested in a profound way.
Most leaders will never even think about such mammoth transactions. But courage in facing reality, self-awareness in examining our biases, honesty in our motivations – these qualities benefit every leader, every day.
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