Mega-mergers like the Disney-Fox deal rarely succeed

Probably not happily ever after.
Probably not happily ever after.
Image: Reuters/Aly Song
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On Dec. 14, Disney announced it would buy 21st Century Fox in a deal valued at more than $66 billion. The House of Mouse will take on Fox’s movie studios, sports networks, Nat Geo, FX, Star TV, stakes in Hulu, and oh—$13.7 billion of Fox’s net debt.

Investors are temporarily happy: the deal has fractionally upped Fox and Disney’s share prices in early trading. Bob Iger, Disney’s current CEO, will delay his planned retirement (again) and stick around until at least 2021 to pilot the new merger as the company moves to develop its own streaming service and compete with Netflix.

Pressed on the reasons for the Fox-Disney deal, James Murdoch, Fox’s CEO, insists it’s all about pleasing shareholders. “Changing the shape of the business is always going to [be considered in terms of] what is going to create the most value to all of our shareholders.”

Mega-mergers destroy value

In reality, mega-mergers almost always tend to destroy value for companies. (Remember AOL-Time Warner?) The very biggest deals are more likely to flop, and produce even worse market returns, than those struck between smaller companies. A report from Accenture found that even among successful large acquisitions (valued at more than $25 billion), returns were not great, between 7% and 12%.

Buyers tend to pay the smallest premiums for the biggest deals, making the deal less savory for the acquiree, but also lowering the bar for the success. The smaller premiums would appear to reflect the complexity of fusing two huge enterprises together, but even then, the combined company tends to perform worse, destroying value.

This deal, the second-largest announced this year, is no exception to the risks of mega-mergers: Disney, a sprawling, close-to-100-year-old company with a distinct culture, will likely face challenges merging with Fox, a younger brand but one that is equally deep-pocketed.

So why do it?

An ambitious acquisition almost always can be taken as a sign that the board is getting cocky. Marquee deals often come when the share price is surging, the overall stock market is booming, and the economy is on a steady path for growth. One of the strongest years for M&A to date—topping at close to $5 trillion worldwide—was in 2007, the year before the housing bubble burst and overvalued stocks finally plunged.

Today, companies are riding high on the back of a market that hasn’t corrected in over a year. The US economy is posting more than 3% growth, business spending is up, and the unemployment rate is near all-time lows. The economy is doing ok, which likely adds to the confidence of companies that are ready to take a bet, against the odds, that their mega-deal will succeed.