A Takeover Frenzy Leads to a Frenzy of Buyer’s Remorse
(Bloomberg Opinion) -- It was only a matter of time before investors saw the aftereffects of the overheated deal environment.
Shares of CVS Health Corp. plunged about 8 percent Wednesday morning after the health-care company announced another writedown of the Omnicare business that it acquired in 2015. The $2.2 billion noncash impairment charge for the latest period follows a $3.9 billion writedown from the second quarter of last year, irrefutable evidence that CVS massively overpaid for the $12.9 billion transaction.
It’s not alone. A merger-and-acquisition frenzy during the last few years drove U.S. takeover valuations to dizzying heights. CEOs, under pressure from shareholders to increase earnings faster, sought growth and cost-cutting opportunities that couldn’t be replicated in-house or would take too long to do so. In many of the larger mergers of the last few years, it seemed likely that the executives and their bankers were using overly ambitious estimates and flimsy math to justify rich takeover prices. But investors were just happy to see them being proactive.
By 2015, U.S. acquisitions that were greater than $1 billion had a median Ebitda multiple of nearly 17, which essentially means the buyer paid upfront for 17 years worth of potential future profit.
CVS paid about 20 times trailing 12-month Ebitda for Omnicare, which dispensed prescriptions to senior-care facilities, according to data compiled by Bloomberg. It said the deal would generate “significant” synergies and that there was a “substantial growth opportunity” given the aging U.S. population. But that hasn’t panned out, as some nursing-home customers have gone bankrupt from a shortage of occupants. CVS recently completed a $78 billion merger with Aetna Inc., including debt, one of the biggest transactions announced amid the M&A craze.
Cosmetics maker Coty Inc. is another company experiencing buyer’s remorse. In 2016, Coty completed a $12.5 billion deal to buy 43 beauty brands, including CoverGirl, from Procter & Gamble Co. Earlier this month, the company said it took a $965 million writedown on its consumer-beauty division. Its shares have suffered a three-year decline of 62 percent, one of the worst returns in the S&P 500 Index over that span.
Campbell Soup Co. is one of the clearest examples of desperate dealmaking. In 2012, CEO Denise Morrison began trying to shift away from the doomed canned-soup business by purchasing Bolthouse Farms, a producer of juices, carrots and salad dressings. Last year, as Morrison stepped down, the company booked a $619 million charge related to that business, which it’s now planning to sell. But soon before the writedown and Morrison’s abrupt exit, she agreed to another likely overpriced deal for the Snyder’s-Lance snack business, so Campbell may not even be out of the woods yet.
Verizon Communications Inc. spent about $9.5 billion to assemble its media group, formerly called Oath, through the acquisitions of AOL and Yahoo. The goal was to create a formidable competitor to Google and Facebook Inc. in digital-ad sales. But revised financial projections in December revealed a substantial reduction in the unit’s fair value, resulting in a $4.6 billion writedown — about half what Verizon paid for the business. Verizon has since downsized the division and shifted its focus back to its wireless network.
These recent examples weren’t even the riskiest deals of the takeover frenzy; the extra-large transactions will take longer to play out. But in October 2015 I wrote, “Today’s mega-deals could be tomorrow’s mega-duds.” Tomorrow has arrived.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Tara Lachapelle is a Bloomberg Opinion columnist covering deals, Berkshire Hathaway Inc., media and telecommunications. She previously wrote an M&A column for Bloomberg News.
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