Just how hard is it to find the best corporate dealmakers at large-cap U.S. companies? Forget the big M&A headlines--the deals trumpeted as the latest record breakers. Too many CEOs have been tempted down the path by the megadeal only to topple over a cliff--ditching their company's performance and reputation in the process.
By now, almost everyone knows megadeals are tough to pull off. That's not to say they don't ever work--but those that do tend to be executed by those relatively rare corporate dealmakers who manage to get the valuation, strategy, execution and integration right. And typically, they already have a number of successful deals under their belt--meaning they probably have seasoned and skilled in-house M&A teams. Which brings us back to the question: how to find them?
For the past four years, The Deal magazine has been taking this question to its readers--corporate dealmakers, investment bankers, lawyers, lenders, private equity mavens, arbitrageurs and M&A service providers. To get the process started each year, we provide voters who determine the winners of The Deal magazine's Most Admired Corporate Dealmakers awards with a list of top transactionally intensive companies. This year we're both broadening our sights and mixing things up a bit. Most importantly, we decided it's time to take the shareholders' pulse and focus on what they're getting out of the M&A bargain--or not. Do shareholders of transactionally active companies beat their industry index returns? We understand that in terms of something as complex as M&A, no single metric tells the whole story. But we think that measuring excess total return to shareholders, or TRS, does get us closer. TRS measures the capital gains and dividends that investors accrue over time.
The list of companies that have generated a combination of excess TRS and have also been relatively deal intensive (a combination of M&A volume and number of transactions) has been drawn from all 10 of the major S&P sectors. S&P Capital IQ provided the total TRS data, and our other partner, Dealogic, provided the deal information.
Readers who have tracked The Deal magazine's prior awards will notice other changes too: We are now looking at five years of dealmaking history to better reflect the protracted integration process many deals require. And we have expanded the number of industries to include all major sectors, not just the five that have been the most deal intensive.
This year's list of candidates is as interesting for those it includes as for those it doesn't. Take the financial sector: Not a single bank made the cut this year. Of course, that shouldn't be a surprise, considering how many have been clobbered since the 2008 financial crisis, to say nothing of the fallout from imminent higher capital requirements and tighter regulations. The financial index produced a negative 16.9% return for the five-year period of the survey (2007-2011), weighed down by the likes of Bank of America Corp. and Citigroup Inc., which generated negative shareholder returns of 17.6% and 27.6%, respectively. J.P. Morgan Chase & Co., an MACD winner for the past two years, still produced a respectable 11.7% outperformance in shareholder returns, but was outflanked by others who produced higher numbers. While the big banks have made few notable acquisitions the past few years, J.P. Morgan and others have kept busy with mostly smaller, undisclosed acquisitions.
This leaves an eclectic mix of contenders that include IntercontinentalExchange Inc., a futures and derivatives exchange that was one of last year's players in the M&A slugfest for control of U.S. stock exchanges. ICE joined forces with Nasdaq OMX Group Inc. in a hostile bid for NYSE Euronext, which had already agreed to merge with Deutsche Börse AG. Ultimately, none of these deals succeeded. Nonetheless, ICE has racked up an impressive acquisition track record under CEO Jeffrey Sprecher.
Meanwhile, the finalist list of technology companies reflects how difficult it has become for hardware companies to generate competitive returns, no matter how savvy their corporate development teams. Companies such as Hewlett-Packard Co. and Dell Inc. delivered negative shareholder returns for the period and so didn't make the cut, although HP was a past MACD winner under former CEO Mark Hurd. During his tenure at HP, Hurd was feted as a dealmaker with a Midas touch. Since his ouster in 2010, however, the company's M&A strategy has suffered from strategic missteps and perceptions of CEO churn.
Hurd is now at Oracle Corp., the software and database company that won last year's tech MACD award. The company has racked up the biggest overall deal volume for the period, at $23 billion and 44 deals. Google Inc. had $21 billion in volume and the most deals of anyone in the sector, 86, with 33 done in 2011 alone. David Lawee, Google's corporate development head, says he fields roughly 1,000 e-mails a day from individuals proposing deal possibilities. And that's just e-mail.
In healthcare, another sector that has led M&A activity the past several years, Express Scripts Inc., boasts the strongest TRS at 17.3%. It has done just four deals but has spent a substantive $39 billion, with some $29 billion of that reflected in its outstanding bid for Medco Health Solutions Inc. In a twist, Medco produced the next highest TRS in the group, at 13%, with nine deals totaling $2.3 billion. The deal, which some expect to close in the second quarter, would produce the biggest pharmacy benefits manager in the U.S.
In the utility sector, there's a similar instance of one top MACD contender trying to buy another. Duke Energy Corp., which has racked up $26 billion in deals across at least 12 transactions the past five years, is still trying to nail its outstanding $13.7 billion bid for Progress Energy Inc. after running into regulatory headwinds. Progress has done just three deals worth $810 million over the survey period, but it has the highest industry TRS at 5.1%. This is the first year the utility sector has been included in the MACD awards, primarily because it doesn't do a lot of transactions relative to other top sectors. In telecommunications, AT&T Inc. made the cut despite its failure to prevail in a protracted fight with regulators in its blockbuster bid to buy Deutsche Telekom AG's T-Mobile USA Inc. unit for $39 billion. The deal's failure cost AT&T a whopping $3 billion breakup fee. Nonetheless, AT&T's share price has since rebounded, and it remains one of the dominant U.S. telecom acquirers. Over the past five years, it has engineered 40 deals and spent at least $15 billion. It's second only to Verizon Communications Inc., which spent at least $47 billion with 17 deals and managed to lead the sector with a 7.2% return.
So we've done our work, culling the ranks of big-cap deal-intensive companies to produce the 10 finalist lists. The next step is up to you--picking those that have demonstrated that they know how to generate long-term value using M&A. That's the art of the MACD awards--the experience that market experts bring in working with and following these companies on the ground. It's also what makes this award unique. - Suzanne Miller