The three big dogs of modern M&A have lost their bite
What’s likely is the end of the burgeoning trend of taking loss-making companies public in the hope the future will come to them
New York — They are the big dogs of modern mergers and acquisitions (M&A) — rapacious deal makers that have devoured mighty corporations, bankrolled young disrupters, and up-ended entire industries. And they’re not looking so tough anymore.
Since 2014, when the latest wave of M&A began to build, three names have inspired fear and envy in the M&A world. In doing so, each has been totemic of a particular vogue in the capital markets:
- 3G Capital, the Brazilian investment firm that has picked off some of America’s most famous brands and aggressively squeezed out costs and jobs.
- Valeant Pharmaceuticals, the ill-fated Canadian company that gobbled up drug makers, drove up prices and fueled outrage over high prescription costs.
- SoftBank, the big-dreaming — and big-spending — Japanese conglomerate that has backed the likes of Uber and WeWork and remains one of the most powerful forces in Silicon Valley.
From the start, the three M&A powerhouses adopted wildly different strategies, but for any investor, the similarities deserve attention. Wall Street believed them and their many imitators to be exceptional. Turns out, they weren’t, and aren’t.
That’s worth remembering at a moment when financial world is struggling to come to grips with the yawning gap between what the pros think companies are worth and what those companies actually fetch on public markets.
3G’s bad mix
Not long ago, 3G, co-founded by billionaire Jorge Paulo Lemann, seemed unstoppable. Lemann became a global name by cobbling together the world’s biggest beer maker, AB InBev; picking up brands such as Burger King and Tim Hortons; and driving the 2015 merger between Kraft and Heinz to create one of world’s largest food companies.
3G has since stumbled — hard. Mixing Kraft and Heinz turned out to be a disastrous idea, and not just for those two companies.
The investment firm’s usual combine-and-cut formula failed miserably at Kraft Heinz. Since Lemann teamed up with none other than Warren Buffett to do the deal, sales and profits have tanked. 3G’s dream of turning Kraft Heinz into the saviour of Big Food ended when Unilever rebuffed its $143bn takeover offer in 2017. In February, Kraft Heinz took a staggering $15.4bn writedown. The company’s stock has plunged more than 70% from its peak, helping to drag down rivals like Kellogg, Campbell Soup and General Mills.
Former management consultant Michael Pearson had a similarly radical idea at Valeant: that drug makers such as itself had no business actually making drugs. Instead, it would borrow money to acquire rivals, dramatically increase the price of their treatments and fire almost everyone. Rinse, repeat.
Valeant’s ambition peaked in 2014 when it teamed up with activist investor Bill Ackman to mount an audacious $54bn takeover offer for Allergan, the maker of Botox. The bid was spurned, but Ackman and Pearson were undimmed and, as if to prove their theory, took the company on a buying spree that included gastrointestinal drug maker Salix ($11.1bn) and Sprout, a developer of female libido stimulants ($1bn).
For a while, investors approved, sending Valeant’s market value to $90bn in August 2015. Then things went spectacularly wrong.
Accounting irregularities, mounting debts and political angst over surging drug prices destroyed not only the Valeant dream, but those of the entire specialty pharmaceuticals industry. Among those that followed Valeant to that 2015 peak, Perrigo, Endo International, and Mallinckrodt have since lost, respectively, 74%, 96% and 98% of their market values. For its part, Valeant is 93% lower, with a new management, board and shareholder base, and has renamed itself Bausch Health.
Hard knock for SoftBank
There is no nice way to bring SoftBank into this part of the story.
By almost any conceivable measure, it is having a diabolical 2019. The quixotic Masayoshi Son, a start-up king maker of undoubted brilliance, has staked SoftBank’s billions — and its reputation — on three companies: Uber, the ride-hailing app which has lost about a third of its value, or $19 billion, since its May initial public offering (IPO); Slack, a messaging platform which debuted in June and is down 35% from where it ended its first trading day; and WeWork.
The scale of these blowups, so starkly at odds with SoftBank’s recent esteemed status, has dislocated the US IPO markets as investors and would-be public companies look sceptically at one another across a widening gulf of value perception.
In hindsight, the impermanence of the three deal makers’ strategies is easy to skewer, but the success of 3G and Valeant was fueled by some of the most well-known names in finance. SoftBank, meanwhile, tapped entire nations to bankroll its ambitions of creating a future of robot-human harmony.
These failures could end up restricting Son’s access to future funding, but it’s unlikely to diminish his vision for what he has said is a 300-year plan to grow the company he started 38 years ago.
Nor, probably, will it dampen his enthusiasm for what he has called the gold rush of investing in nascent technology. “It’s just a money thing. It’s not important, it’s just a process. What is more important is humans’ happiness. How do we help ourselves, humans, become happier?” Son said in 2017, calling himself a “super optimist”. “There’s always a solution.”
What’s more likely is the end of the burgeoning trend of taking loss-making companies public in the hope the future will come to them. Perhaps, too, some doubt will attach itself to the idea that pumping a young business with money and expecting it to succeed isn’t an idea of wheel-inventing novelty.
Either way, there will be something else to worship soon enough. There always is.
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