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M&A activity down for lack of upside

Alan Berro
Portfolio manager
Based in:
Los Angeles
Investment experience:

ALAN BERRO: The reason we haven’t seen more consolidation is that, number one, I think managements today are held a lot more accountable, so they’re all evaluated on return on invested capital. And when you do a large acquisition, you’re committing a lot of capital, and if you have to pay any sort of premium, it’s not always obvious that the returns are going to be improved over the long term. You may get a one‑ or two‑year boost, but then you’re carrying a much bigger asset burden. And so I think, given the metrics that most managers are measured on today, the math of doing large acquisitions is a lot tougher than it used to be. And I think if you look at the history and the results of large acquisitions, the report card is not that great. So I think that’s one of the headwinds you’re flying into.

I think the other one that goes hand in hand with that is that there are not that many small deals out there. When you look at what’s happening in the food sector or the pharma, those are big companies. It’s not obvious that you get a lot of synergies taking two $25 billion companies and making a $50 billion company, because a $25 billion company, I would argue most days of the week, is probably already very efficient. There’s not a lot more economy of scale to be gained in a lot of industries, so the acquisitions aren’t as compelling.

M&A will always be there, and we’ll always have transactions. If you would have asked me two or three years ago, “Will we see a large wave of corporate M&A?” my guess would have been, yes — that interest rates are low, there’s a lot of cash, there are some companies that are fairly cheap on a P/E basis. You saw some, but you didn’t see that much. You could have seen a lot more. And I think that a lot of industries have been fully consolidated.

I’m not going to say that M&A is done. I just think that there’s a lot more discipline in the system today that makes it harder for managers to just go out and buy something for the sake of getting bigger.


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