The Horrible Mistake at the Heart of the Halliburton-Baker Hughes Deal
The unraveling of the Halliburton-Baker Hughes deal might finally expose the folly of executives who think M&A is a reasonable substitute for actual growth.
The last year or so has been a reckoning for the pro-M&A crowd.
It’s not just Halliburton (HAL). A number of companies and executives have gone down the acquisition alleyway, only to find their path blocked. Comcast (CMCSA) spent a little over a year and $336 million trying to acquire Time Warner Cable (TWC) before being forced to call off the deal. Drug giant Pfizer (PFE) has been rebuffed twice trying to do big deals.
Now Pfizer CEO Ian Read has to eat crow and prove to the market that his company can be great on its own, after pretty much spending the past two years saying it was a big deal or bust. And that’s not even mentioning Valeant, which had a business model that was essentially based on acquisitions and has crashed and burned in the past six months.
But even among those deals, Halliburton M&A misfire ranks high on the list of mess-ups. The deal was announced in November 2014, so it has been hanging over both companies for the past year and a half. And while the plunge in oil prices hasn’t helped business, the extra pressure to complete the deal hasn’t helped Halliburton either. Earnings at the company fell by over 100% last year—to a loss of nearly $700,000 from a profit of $3.5 billion in 2014. That compares to a drop of 50% at rival Schlumberger, which still earned $2.5 billion in 2015.
What’s more, from the start, the Baker Hughes acquisition looked certain to face a pretty steep anti-trust hurdle. Yet, Halliburton’s executives agreed to a $3.5 billion break fee with no exemption from paying the fee if the deal was blocked by regulators. How much did Comcast pay Time Warner Cable when that deal was called off? Zip. Nada. That should make Halliburton shareholders rethink their confidence in company executives’ judgement and ability to negotiate.
So far this year, there has been $465 billion worth of abandoned M&A deals, according to Dealogic.. That’s the highest in the same time period since 2007, and more than double the $189 billion we had in withdrawn deals at this point last year.
But it’s not just that more and more companies are getting rebuffed. The bigger question is what were they getting anyway. M&A has long been corporate America’s answer to a lack of innovation. And in the past few years, with the economy just plodding along, the advice from Wall Street and elsewhere that deals are your best shot at growth has only gotten louder. But evidence that M&A deals work out in general is shaky at best. In 2012, I wrote about a study that looked at the winners of bidding wars for contested acquisitions, and found they generally do worse over the next few years that the companies that lost.
And the returns appear to be getting worse. In 2014, U.S. companies spent $1.4 trillion on deals—a record amount. And yet in 2015, earnings growth of the S&P 500 rose a collective $195 million, for return on M&A investment of just 0.01%. Not a great return. And that’s not factoring in all the restructuring charges that come out of those deals.
Yet, CEOs don’t seem to have learned. Last week alone, $50 billion in healthcare deals were announced. And now that earnings have slipped at biotech darling Gilead Sciences (GILD), shareholders and Wall Street analysts say the answer for the company is to do a big deal.
So far Gilead has been resisting the urge, which is good news. M&A is no balm for Gilead or the rest of Wall Street.