Who wins from takeover battles?

There’s a good chance that the long-awaited tie-up between brewing giants AB InBev and SABMiller (see below) will go ahead, despite SABMiller’s efforts to remain independent. But while the takeover battle could be over within a week, it will take much longer to find out which shareholders are the real winners.

Market wisdom holds that about one in ten deals benefits shareholders in the bidding firm. This figure seems to have come from a KPMG study that took place at the height of the tech bubble: it found that just 17% of deals helped the acquirer and more than half destroyed value. KPMG’s follow-up reports suggested that this was an extreme outcome: between 1999 and 2009, roughly one-third of deals created value, one-third were neutral and one-third destroyed value. But it certainly suggests that mergers and acquisitions (M&A) usually disappoint.

Other research broadly backs this up. A 2001 review by Robert Bruner of the University of Virginia looked at 130 prior studies from 1971 and 2001 and concluded that only 20%-30% of deals created significant value for shareholders in the bidding companies. Excess returns across all bidders averaged zero. However, shareholders in the target companies earned sizeable positive returns and these gains offset the weaker returns for shareholders in the bidders. So overall, M&A appears to be good news for investors in aggregate – but in most cases, all the benefits accrue to those being bought out rather than the buyers.

When it’s better to pay cash

It’s generally assumed with takeovers that deals done in cash are more likely to be worthwhile than those done in stock, because executives are more hard-headed when they have to spend real money instead of issuing more shares to fund the deal. Again, the evidence seems to back this up: Bruner’s study finds that stock-based deals are associated with significant negative returns, while cash ones are likely to be neutral or slightly positive (with the exception of firms with excess cash, who are more likely to squander it).

However, stock-based deals may benefit onetype of bidder: those that are themselves overvalued. A 2009 paper by Pavel Savor of University of Pennsylvania and Qi Lu of Northwestern University found that while bidders in successful stock-based deals underperformed, the bidders in failed stock-based deals underperformed by a greater amount. So while investors would still be better off dumping overvalued empire-builders, successful acquisition sprees may at least be reducing losses. Conversely, bidders in failed cash-based deals do not seem to do worse than those in successful deals.

Lastly, there is some evidence that results vary depending on the type of deal. Large-cap mergers in the pharma industry between 1995 and 2011 delivered excess returns, according to a study by Myoung Cha and Theresa Lorriman of consultants McKinsey. Meanwhile, returns across all industries were neutral and those in technology were heavily negative.

An AB InBev-SABMiller deal is an arguably similar consolidation deal in a mature business. That may bode well. So could AB InBev’s intention to pay cash. Still, history suggests SABMiller’s investors are on a surer footing overall.

The last big deal for Big Beer

AB InBev had been expected to bid for SABMiller for several years, as the last major step in a wave of consolidation in the global brewing industry. Both firms are themselves the result of a string of mergers. AB InBev was formed out of America’s Anheuser-Busch, Brazil’s AmBev and Belgium’s Interbrew, all of which were in turn the result of previous deals. SABMiller was the outcome of South African Breweries buying US-based Miller Brewing after both had rolled up a number of smaller firms.

The two firms are the world’s largest breweries by revenues and putting them together is the only easy deal left to be done in the sector. A quarter of Heineken, the number three, is still owned by the founding family, who rebuffed a bid from SABMiller last year. Carlsberg, the fourth-largest, is controlled by a foundation that is equally disinclined to sell.

AB InBev’s latest offer price of £42.15 per SABMiller share values SABMiller at £72bn (including its debt), the third-largest M&A deal ever, according to data firm Dealogic. But while a deal now appears relatively likely, it certainly isn’t done yet. American tobacco firm Altria, SABMiller’s largest shareholder, is backing the bid, but AB InBev still seems to be struggling to win over Colombia’s Santo Domingo family, which owns 15%.

If the merger goes ahead, the combined firm would account for more than a third of global beer sales and hold first or second place in 24 of the world’s 30 biggest beer markets. So a number of disposals may be needed to satisfy competition authorities – in particular, SABMiller’s 49% interest in China’s CR Snow and its US MillerCoors venture with Molson Coors are likely to be on the block (in both cases, the joint venture partner is the most likely buyer, although there could be a chance for Heineken to take a stake).

However, the one-of-a-kind opportunity to add SABMiller’s fast-growing African assets to AB InBev’s Latin American operations – thereby helping to offset falling beer sales in the mature North America and Europe – clearly offsets the likely loss of these assets in AB InBev’s view.

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