On 28/02/2014 11:31:32,
Makisig
wrote:
Thank you for the link. I am always trying to keep an open mind and debate helps us all to learn.
After reading the Mckinsey article, my negativity has moderated a little but I still remain concerned for the following reasons:
1. The data is arguably insufficient and I don't think it is fair to measure success/failure over a 2 year period (we need a longer period, maybe 10-15 years).
2. "ROIC" excludes Goodwill - I presume on the denominator. Well, it is very easy to add value if you ignore much of the acquisition cost!!!
3. Economic profit rises significantly two years after consolidation deals. But this will fall after 5-10 years if r&d/replacement spending is insufficient and Mckinsey provides no window into this. This is something I am concerned may be happening at Valeant, Actavis, Endo.
4. The data produces somewhat inconsistent results (though this is "real life" so this should not surprise us). "Consolidations" seem to add the most value (leaner cost base, etc.), yet we then read this:
"... (TRS): for consolidation deals, excess returns are positive three years after the merger but turn negative after five years; for growth-platform deals, TRS is consistently positive through the five-year mark."
I would argue most of the specialty drug deals recently seen are "consolidations" (very cost-synergy-heavy).
5. The median excess TSR for acquirers two years after the deal is just 5%. Yet the specialty drug stocks are generally +100% in the past 12 months as more deals are anticipated. Maybe this has run too far?
6. Luckily throughout the period under examination (1995-2011) interest rates kept falling. Surely there is a higher chance of rising interest rates of the next 15 years?
Not trying to rain on anyone's parade here. I have no long/short interest here - just a fascinated sideline observer, and a natural, though certainly not always correct, sceptic.
Makisig
