The debate about Pfizer’s proposed takeover of the UK’s AstraZeneca – which should have resolved itself by the time you read this – reminds us that there are some big unanswered questions relating to institutional investors and M&A activity.
Do you know how many times your fund or your manager has voted against M&A deals in the last five years?
In the US, one senior researcher says the figure is 90%. I have yet to find one pension fund in the UK that reports aggregated data. And this lack of basic data analysis tells us a lot about the perceived importance of the issue.
So does it matter? Yes: the employees of the target firm rarely do well. But the bottom line is that investors benefit, right?
The inconvenient truth is that investment professionals benefit but not end beneficiaries.
To be very conservative, one in two M&A transactions fails to deliver. Actually, if you use the definition of CreditSuisse HOLT, the success rate reduces to 13%. The failure to invest in R&D, innovation, and new capex too many times has led investee companies to attempt to buy growth.
One firm that specialises in post merger integration describes the current situation very clearly: “Despite years of academic study, corporate experience and maturing best practice, for most firms this situation isn’t improving… Why has so little changed?”.
The explanation for a systemic learning disability is in essence simple – it’s hard to get a man to understand what his job pays him not to know and clearly M&As reward intermediaries (very) well.
The CEO of the combined organisation is guaranteed a bigger pay cheque and the outgoing CEO can look forward to generous buyout arrangements too. Banks, lawyers, PR firms and post integration consultancies are all understandably hooked on this income stream.
And what is less well understood is that buy-side fund mangers also get benefits from saying yes. M&A is a good opportunity to make short-term profits from selling the target company but too many fail to create 3-5-year positive economic profit growth. Moralising and blaming the buy side for doing what it is logical to do completely misses the point.
So what can change this situation? As with other ‘preventable surprises’ the answer is a multi-faceted one.
In the UK, the government could reduce the opportunities for corporate-political capture by creating a robust takeover panel, which would remove take-over decisions from the hands of politicians.
Regulators could require pension funds and investment managers to report, in public, on their aggregated M&A voting record, perhaps a rolling five-year average. Sunlight is a very effective disinfectant. A private voluntary initiative like PRI or ICGN could oil the wheels of change by doing this reporting ahead of regulation.
Investment managers could pay for quality independent research to evaluate the likelihood of success. Asset owners could ensure this is rewarded by making it a factor in the manager selection process.
The gap on all these fronts is large, which explains why things are such a mess.
So is there cause for hope? A recent Financial Times article by Martin Wolf about Pfizer’s bid gave me cause for hope. Wolf explains why he is re-evaluating his support for investor oversight – perhaps it is not the least-worst option. And the public engagement of the normally very conservative Wellcome Foundation has also been encouraging.
By the time you read this, investors may have approved the acquisition, in which case they will have walked into another PR nightmare. Or they might, having been rudely awakened, have chosen to do the right thing. Either way, I expect this MA deal will be the catalyst for a cure to this very unhealthy pattern of collusion. Such a cure would be a fitting gift from Big Pharma.