Merger Bubble May Burst as Record Goodwill Piles Up: Real M&A
2015-08-25 21:54:51.228 GMT
By Tara Lachapelle
(Bloomberg) -- The biggest threat to U.S. stocks right now
may not be China, currencies or commodities prices. It might be
American companies’ own merger appetite.
Acquirers worldwide have already spent $2.2 trillion on
transactions in 2015, putting the year on track for a record.
The buying spree has been particularly audacious in the U.S.,
where acquirers are offering record prices relative to the
revenue and profit they’re gaining from the deals.
The result: Goodwill is surging. It jumped substantially
this quarter, to $2.5 trillion for members of the Standard &
Poor’s 500 Index, according to data compiled by Bloomberg.
That’s a new record, and a sign that dealmakers are increasingly
overpaying.
Need more proof? American publicly traded companies are
selling for 3 1/2 times their book value. In dollar terms,
that’s $700 billion paid for assets that are worth only about
$200 billion on paper.
“I’m amazed at what people are paying for companies,”
Mandeep Trivedi, a principal in the valuation practice at Citrin
Cooperman, said in a phone interview. “I don’t know of an
industry where I’m not taken aback by what people are willing to
pay.”
The data validate a growing concern among some investors
that mergers have formed a bubble and looming writedowns may pop
it. But up until last week, the U.S. stock market appeared
sturdy, save for the ongoing weakness in oil shares. And the
economy was proving durable enough for the Federal Reserve to
contemplate its first interest-rate increase in years.
Then came the selloff, precipitated by a rout in emerging
markets. The S&P 500 is now down 8.7 percent for the year. It
signals the market’s fragility and how easily a few ill-fated
mergers could roil equities.
Not all the goodwill out there is bad. Much of the S&P 500
comprises major companies with strong brand names and valuable
patents, which are recorded on their balance sheets as goodwill.
The problem is how quickly this intangible asset is
accumulating, as many companies overpay for acquisitions. When
that happens, the buyer eventually has to write down the
purchase, thereby reducing net income.
Current goodwill levels don’t even account for all of this
year’s dealmaking because some transactions haven’t closed yet.
Two-thirds of the takeovers announced so far in 2015 are still
pending, many of which will extend into next year.
One industry marked by pricey takeovers lately is
pharmaceuticals. Take Endo International Plc. The company, one
of the many drugmakers seen as needing to hunt or be hunted,
agreed in May to buy Par Pharmaceutical Holdings Inc. for about
$8 billion. That’s 66 times what Par earned before interest,
taxes, depreciation and amortization in 2014.
Chipmakers Avago Technologies Ltd. and Broadcom Corp. also
agreed to a costly merger in May. The $37 billion offer is the
equivalent of about 24 times Broadcom’s Ebitda. St. Jude Medical
Inc., the medical-device company, is acquiring Thoratec Corp.
for 42 times Ebitda, or $3.3 billion. And just last week,
Liberty Interactive Corp.’s QVC business agreed to buy online
retailer Zulily Inc. for about $2 billion, or 72 times Ebitda.
These frothy valuations have helped push the median Ebitda
multiple for U.S. takeovers larger than $1 billion to almost
double the level in 2012.
The irony is that an ubiquitous need for earnings growth is
driving many of the large transactions that were struck this
year. But if acquirers are paying too much, profit will instead
take a punch.
Just ask Microsoft Corp. (Nokia writedown), Hewlett-Packard
Co. (Autonomy and Palm), mining-related companies such as Rio
Tinto Group and Caterpillar Inc. that bought at the commodities
top and a slew of other corporations tarnished by deal
decisions.
So while the M&A market keeps bustling now, it may not be
long before the skilled dealmakers are sorted from the ones who
should have steered clear.
For Related News and Information:
Buffett Skirts 2015’s Record-High Takeover Valuations: Real M&A
Merger Machine Keeps Rewriting Record Books This Year: Real M&A
Hedge Fund’s Forecast for Record Deals May Come True: Real M&A
Daimler to Rio Tinto Show New Surge in Deals Perilous: Real M&A
Real M&A columns: NI REALMNA
Top deal stories: DTOP
To contact the reporter on this story:
Tara Lachapelle in New York at +1-212-617-8911 or
tlachapelle@bloomberg.net
To contact the editors responsible for this story:
Beth Williams at +1-212-617-2307 or
bewilliams@bloomberg.net
Elizabeth Wollman
2015-08-25 21:54:51.228 GMT
By Tara Lachapelle
(Bloomberg) -- The biggest threat to U.S. stocks right now
may not be China, currencies or commodities prices. It might be
American companies’ own merger appetite.
Acquirers worldwide have already spent $2.2 trillion on
transactions in 2015, putting the year on track for a record.
The buying spree has been particularly audacious in the U.S.,
where acquirers are offering record prices relative to the
revenue and profit they’re gaining from the deals.
The result: Goodwill is surging. It jumped substantially
this quarter, to $2.5 trillion for members of the Standard &
Poor’s 500 Index, according to data compiled by Bloomberg.
That’s a new record, and a sign that dealmakers are increasingly
overpaying.
Need more proof? American publicly traded companies are
selling for 3 1/2 times their book value. In dollar terms,
that’s $700 billion paid for assets that are worth only about
$200 billion on paper.
“I’m amazed at what people are paying for companies,”
Mandeep Trivedi, a principal in the valuation practice at Citrin
Cooperman, said in a phone interview. “I don’t know of an
industry where I’m not taken aback by what people are willing to
pay.”
The data validate a growing concern among some investors
that mergers have formed a bubble and looming writedowns may pop
it. But up until last week, the U.S. stock market appeared
sturdy, save for the ongoing weakness in oil shares. And the
economy was proving durable enough for the Federal Reserve to
contemplate its first interest-rate increase in years.
Then came the selloff, precipitated by a rout in emerging
markets. The S&P 500 is now down 8.7 percent for the year. It
signals the market’s fragility and how easily a few ill-fated
mergers could roil equities.
Not all the goodwill out there is bad. Much of the S&P 500
comprises major companies with strong brand names and valuable
patents, which are recorded on their balance sheets as goodwill.
The problem is how quickly this intangible asset is
accumulating, as many companies overpay for acquisitions. When
that happens, the buyer eventually has to write down the
purchase, thereby reducing net income.
Current goodwill levels don’t even account for all of this
year’s dealmaking because some transactions haven’t closed yet.
Two-thirds of the takeovers announced so far in 2015 are still
pending, many of which will extend into next year.
One industry marked by pricey takeovers lately is
pharmaceuticals. Take Endo International Plc. The company, one
of the many drugmakers seen as needing to hunt or be hunted,
agreed in May to buy Par Pharmaceutical Holdings Inc. for about
$8 billion. That’s 66 times what Par earned before interest,
taxes, depreciation and amortization in 2014.
Chipmakers Avago Technologies Ltd. and Broadcom Corp. also
agreed to a costly merger in May. The $37 billion offer is the
equivalent of about 24 times Broadcom’s Ebitda. St. Jude Medical
Inc., the medical-device company, is acquiring Thoratec Corp.
for 42 times Ebitda, or $3.3 billion. And just last week,
Liberty Interactive Corp.’s QVC business agreed to buy online
retailer Zulily Inc. for about $2 billion, or 72 times Ebitda.
These frothy valuations have helped push the median Ebitda
multiple for U.S. takeovers larger than $1 billion to almost
double the level in 2012.
The irony is that an ubiquitous need for earnings growth is
driving many of the large transactions that were struck this
year. But if acquirers are paying too much, profit will instead
take a punch.
Just ask Microsoft Corp. (Nokia writedown), Hewlett-Packard
Co. (Autonomy and Palm), mining-related companies such as Rio
Tinto Group and Caterpillar Inc. that bought at the commodities
top and a slew of other corporations tarnished by deal
decisions.
So while the M&A market keeps bustling now, it may not be
long before the skilled dealmakers are sorted from the ones who
should have steered clear.
For Related News and Information:
Buffett Skirts 2015’s Record-High Takeover Valuations: Real M&A
Merger Machine Keeps Rewriting Record Books This Year: Real M&A
Hedge Fund’s Forecast for Record Deals May Come True: Real M&A
Daimler to Rio Tinto Show New Surge in Deals Perilous: Real M&A
Real M&A columns: NI REALMNA
Top deal stories: DTOP
To contact the reporter on this story:
Tara Lachapelle in New York at +1-212-617-8911 or
tlachapelle@bloomberg.net
To contact the editors responsible for this story:
Beth Williams at +1-212-617-2307 or
bewilliams@bloomberg.net
Elizabeth Wollman