In late November, U.S. pharmaceutical giant Pfizer capped weeks of fevered speculation with the announcement that it would merge with Irish drugmaker Allergan. USA Today reported that the combination would be truly massive: by market value, it’s the largest drug company merger to date, as well as being the second-largest U.S. corporate merger to date.
The Pfizer-Allergan deal brings up the issue of mergers and acquisitions, which most Americans don’t think about on a regular basis. M&A activity constantly churns below the surface of the economy, injecting liquidity into credit and labor markets, creating and destroying jobs, and — hopefully — creating value for shareholders.
Former M&A professionals, who worked in the finance industry for years before his election as Delaware state treasurer, are keen to share their M&A knowledge and expertise with the public. Here are four things most folks don’t know about M&A, including the biggest mergers and acquisitions.
1. They’re Often Done to Evade U.S. Taxes
The Pfizer-Allergan tie-up is merely the latest in a spate of recent mergers between American and overseas firms. The business value of these biggest mergers and acquisitions, at least in part, is best seen through the fearsomely complex lens of U.S. tax law. After accounting for various industry-specific credits, incentives, deductions, and what have you, U.S. corporate tax rates are generally higher than elsewhere in the developed world — and especially higher than in small European countries like Ireland. Some of the biggest mergers and acquisitions in recent history have involved American firms binding themselves to European firms: Medtronic (U.S.) and Covidien (Ireland), for instance, or Anheuser-Busch (U.S.) and InBev (Belgium).
2. They Don’t Always Go Through
Major mergers often face regulatory scrutiny, particularly in sensitive industries like telecommunications, energy, and pharmaceuticals. Mergers with antitrust implications — those that, if consummated, would effectively create a territorial or sector monopoly — are most likely to fail. For that reason, it’s not clear that the planned $104 billion merger between SAB Miller and InBev will go through as planned.
3. They’re Not Always Great News for Consumers or Employees
The business case for M&A activity often revolves around efficiency and cost control. That doesn’t always bode well for workers. Employees at bought-out firms are often rendered redundant, particularly when they have direct counterparts at the acquiring firm. Meanwhile, mergers often reduce consumer choice and usually result in higher prices.
4. They’re Vital to the Economy: Biggest Mergers and Acquisitions M&A
For all the apparent downsides of M&A activity, mergers and acquisitions are absolutely vital to the economy’s smooth functioning. The prerogative of businesses to associate and combine is a hallmark of a free economy. And though some biggest mergers and acquisitions clearly produce short-term pain for workers and consumers, the long-term positives often outweigh the drawbacks, particularly when workers dislocated by M&A activity go on to start their own businesses or bring vital knowledge to competing firms.
What’s your opinion on M&A activity? Do you think it’s a net positive for the economy, or do you worry that there are just too many downsides?