The Dark Side Of A Record $5 Trillion In Mergers: Hundreds Of Thousands Of Imminent Layoffs
Yesterday afternoon, Dealogic announced the for the first time in history, global announced M&A volume in 2015 would surpass $5 trillion. This record eclipses by 9% the previous all time high of $4.6 trillion set during the previous market bubble year of 2007.
The report adds that there were 10 $50 billion M&A transactions announced in 2015 worth a combined $798.9bn. That's five deals more than the previous record high activity set in 1998, 1999, and 2014. US targeted M&A ($2.5tr) accounts for half of 2015 volume and seven of the top 10 transactions.
Breaking down by total by sector, Healthcare ($723.7bn) and Technology ($713.1bn) were the leading sectors. The biggest deals announced in 2015 were Pfizer and Allergan's pending $160bn merger, followed by Anheuser-Busch InBev's $117.4bn bid for SABMiller, two of only eight $100bn+ transactions announced on record.
Below we show the table of the Top 10 deals is below, as well as a simplified chart:
Many have debated what has unleashed this unprecedented merger frenzy, even if the answer is simple: record low costs of debt have been used by management teams not only as a source of funding for record buybacks (pushing the acquiror's stock as a merger "currency" to all time highs), but also to fund ever greater portions of the merger consideration. The result are M&A EV/EBITDA multiples in the high teens, 20s, and even 30s (or higher) as hundreds of billions of investment grade debt have been issued to fund "financial engineering", be it buybacks or M&A, just not prefunding future revenue growth via spending on CapEx.
As the following chart from BofA shows, just over the next few months there is at least half a trillion in in deals that have to be funded with investment grade debt: for the sake of these management teams, they better pray that the IG market does not suffer a comparable shut down as what happened to the junk bond market over the past two months.
Funding needs notwithstanding, the immediate result of this epic merger scramble has been a year of declining corporate revenues as well as a profit and earnings recession. The not so immediate result has been a silent layoff wave (focused initially in the energy sector) as increasingly more well-paying careers are lost and replaced with minimum wage food service and retail, often times part-time, jobs.
However, none of that accounts for the layoff shock that is about to be unleashed as hundreds of billions of M&A deals go from announced to closed over the coming months, as the "pro-forma"management (and shareholders) demand to see cost-savings and bottom line results.
Where are "results" going to come from? Why "synergies" of course, Wall Street's favorite word for mass layoffs.
To be sure nobody knows just how many workers will be fired, however in a recent white paper by the Ivey Business Journal titled "Merger Synergies Through Workforce Reductions", we read, not surprisingly, that "the greater the workforce consolidation, the more attractive the economic results. For example, with a 30-per-cent workforce reduction in Option 3, economic measures such as the payback period and annual operating savings are far more prominent than in Option 1. Most notably, with a 30-per-cent versus a 10-per-cent staff reduction, the EBITDA margin improves by 500 basis points."
Taking another look at the top 10 M&A deals of 2015, we can quickly calculate that at just these 10 combined companies, the number of pre-synergy workers will be a massive 1.14 million employees. We used pre-synergies because over the coming year, the full extent of the layoffs synergies, will be revealed. Taking the conservative estimate from the Ivey "synergy" paper and extrapolating "only" of total employees will be laid off as management teams scramble to boost payback periods and operational savings, this means that between these 10 companies alone, there will be over 110,000 soon to be laid off workers.
These are 110,000 (or more) well-paying jobs, which in the current economy will not be easily duplicated and which will leads to even more minimum wage "job gain" in the coming year.
Putting this in perspective, this accounts for only ten of the deals, amounting for a little over 10% of the total M&A deal volume of 2015.
There is a silver lining: for every million in lost jobs, Wall Street bankers will make about a billion in M&A fees, which after all is what really matters.
Finally, perhaps cementing the irony of all of the above, is a forecast we made several weeks ago when looking at the 5th largest deal on the list above: the merger of Dow Chemical and DuPont. This is what we said:
DuPont employees: 63,000 +
Dow Chemical employees: 51,635
= 11,465 new layoffs
— zerohedge (@zerohedge) December 11, 2015
Moments ago 10% of our prediction was validated with the following news:
DuPont Co. plans to cut 1,700 jobs in its home state of Delaware as the agriculture-and-chemical giant pursues $700 million in cost savings ahead of its planned merger with Dow Chemical Co.
In a letter to DuPont staff on Tuesday, Chief Executive Ed Breen also sought to soften the holiday blow, announcing that Wilmington, its hometown of 213 years, will be the headquarters of one of three planned spinoffs following the Dow tie-up.
The layoffs, which represent nearly a quarter of DuPont's roughly 7,000 employees in Delaware, come as DuPont consolidates some of its scientific research operations and moves corporate functions to other locations that are closer to its customers, Mr. Breen said.
“The effect in Delaware will be significant, reflecting the urgent need to restructure our cost base and, as part of that effort, reduce our corporate overhead costs so that we can remain competitive,” he wrote. Delaware state law required DuPont to file a notice of the layoff plans by Dec. 31, forcing the company to outline it publicly before all affected individual employees were told the news, Mr. Breen wrote.
At least the company was kind enough to wait until after Christmas before handing out the first of many rounds of pink slips.
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