Promises, promises. It has been a record year for mergers and acquisitions — but 2015 has also been a record-breaker for wild promises about what those deals will deliver.
Of the $4.7tn of deals announced so far this year, says Dealogic, two are among the 10 biggest, and nine had a value of $50bn or greater.
The superlatives continue. Royal Dutch Shell’s plan to take over BG Group is the largest oil and gas cross-border deal on record. Hutchison Whampoa’s agreement to combine with Cheung Kong Holdings is the largest Hong Kong-targeted deal in history.
And the records do not end there. Goldman Sachs, JPMorgan, Morgan Stanley and Bank of America Merrill Lynch have each advised on more than $1tn worth of deals, more than in 2007, which marked the last peak in M&A volumes.
That date should raise an eyebrow — given that it also marked the last hurrah before the financial crisis — and so should the promises accompanying these deals.
Deloitte has calculated that the savings companies have said they will deliver to shareholders amount to between $1.5tn and $1.9tn, or an annualised rate of $150bn to $200bn.
To put these numbers in context, the world’s business leaders have promised to create additional value this year equivalent to the annual gross domestic product of Canada or Brazil — or more than $205 per person on the planet.
Put like that, the numbers sound absurd. But Deloitte adds that managers (of whom it interviewed 800 in the US) believe they significantly under-promise and over-deliver on deal-related savings. As if to prove that assertion, last month Shell said it was raising its original estimate of the savings it could deliver from buying BG by 40 per cent.
However, Deloitte also found that managers underestimate the true costs of integration. And this is not the only reason why the near-$2tn of promised savings should not give investors a warm glow.
It also turns out that the synergies do not offset the costs of the announced deals, which are estimated to be between $200bn and $250bn on an annualised basis.
They also take no account of the premium paid, which is pure extra cost that a buyer adds to a target’s market value.
And although most of the promises are measurable cost savings — such as consolidating head offices, cutting operating costs or improving purchasing power — they also sometimes include “revenue synergies”, which essentially measure the ability to increase earnings faster because of the deal.
But these revenue synergies are notoriously hard to calculate, partly because the “counterfactual” — how the companies would have performed without a deal — is never available. Investors should take the promises that dealmakers made in 2015 with the same pinch of salt they deserved in 2007.
Business of government
Last week, the UK’s Institute for Government published testimony from more than 30 former ministers about life in Whitehall. And the ex-ministers clearly leapt at the chance to lay bare the real world of government behind the public façade.
One former education minister spoke of disarming his civil servants with jelly babies. Another described the irreconcilable differences between the home secretary, Theresa May, and Nick Clegg, the former Liberal Democrat leader.
Beneath the humour, though, lie worrisome details. Vince Cable, former business secretary, said that in the run-up to the 2010 spending review, he was “faced with making decisions on things and places I had never heard of — and had absolutely no understanding of the arcane public accounting concepts that they used”.
This was one reason, Mr Cable says, why the government “ got into trouble” over Sheffield Forgemasters, the steel company from which it withdrew a state-aid loan.
Such bluntness from senior government figures is rare, even when out of power. Less surprising, and genuinely worrying, is that the boss of one of the most important government departments for UK business felt so ill-prepared.
Mr Cable also seemed to feel rather little democratic accountability. “We didn’t engage very much or worry very much about parliament,” he says airily. “It was much, much, much more about the media. I was quite active in the media and that was how I communicated rather than through parliament.”
At least we now know that the business press has a role.
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