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Why was 2014 a year of mergers and mega deals?

2014 has been a banner year for corporate mergers, with more than $3 trillion in deals announced worldwide. What kind of impact do these deals have on the companies, employees and the economy? Hari Sreenivasan learns more from Andrew Ross Sorkin of The New York Times.

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    With less than a week to go, the Dow Jones averages may be poised to finish the year at a record high. Other stock indexes are also back to high levels. But that's not all. 2014 has turned out to be the biggest year for multibillion-dollar mergers and acquisitions since the financial crisis hit.

    Hari Sreenivasan has the story.


    Thanks, Judy.

    More than $3 trillion in deals worldwide have been announced this year, many of them including American companies. There have been some enormous ones in the pharmaceutical world. Drugmaker Actavis is buying the manufacturer of Botox, Allergan, for $66 billion. There are more than $400 billion of announced deals in the health care sector overall.

    Media mega-deals were a part of this boom too. Comcast will pay $45 billion for Time Warner Cable, if regulators approve it.

    What's behind the frenzy? And what kind of impact do these deals have on the companies, employees and the economy historically?

    For that, we turn to Andrew Ross Sorkin. He co-hosts "Squawk Box" on CNBC and is a columnist for The New York Times and editor at large of its DealBook section.

    So, Andrew, what's behind all these mergers and acquisitions this year?

  • ANDREW ROSS SORKIN, The New York Times:

    Well, what's behind these deals is actually what's behind the market, which is confidence.

    Mergers and acquisitions happen to be probably one of the better barometers of confidence, not so much just in the market itself, but really in the boardroom and corner offices of these businesses. CEOs feel better about their businesses. Perversely, they don't do deals when they probably should, which is when the market is low, but as the market gets better, they feel better about their own condition.

    And, therefore, they go out and make deals. It's a quick way to add revenue at a time when a lot of businesses are struggling to grow unto themselves and so they go out and they buy. There are remarkably low interest rates now, cash on the balance sheet. You mentioned those pharmaceutical deals. A lot of those were driven by taxes, the idea of a tax inversion, this idea that you could go effectively change your headquarters abroad.

    Now, the Treasury Department and the Obama administration have tried to prevent that, but those were some of the things that came together this year that really pushed so many of these deals across the finish line.


    So, is it that the board of directors of companies look at that cheap cash or cheap debt that you mentioned and they see this big stock price, and so they almost have more currency to go out and make these acquisitions?


    That's what traditionally happens.

    You have a lot of cash on the balance sheet. You think to yourself, what can I do? Can I build a new — if I build a new factory on my own, will that help? Or can I go buy that business over there? Would that help me? And, by the way, would that help me sooner?

    One of the things that happens in all of these transactions is you always hear the word synergy or rationalization. So the bad news is that traditionally what that means is somebody's losing their job. They're trying to save money and create additional profits, and the way they do that is of course by merging these two businesses together and then squeezing by removing the jobs that overlap.


    OK. In the short term, when we see that kind of price bump on the company that is about to get bought, historically, do mergers make sense? Because we also see on the flip side a lot of these mergers start to dissolve.


    You are hitting the nail on the head. At least 50 percent of transactions, big mergers like this, fail, and, frankly, some of them fail spectacularly. The academic literature suggests that deals unto themselves are not a panacea at all.

    And, in fact, one the things we're also seeing this year is the breakup of many companies. So, you're seeing Hewlett-Packard, which merged with Compaq over a decade ago, they're splitting themselves up; eBay is breaking itself up. And, historically, it's actually the breakups which create more value over time, oddly enough, than the mergers themselves.



    What's the role of activist investors? We have seen the Carl Icahns and the Daniel Loebs of the world make a lot of news this year.




    What are they doing and does that increase or decrease this flow of mergers and acquisitions?


    You have also hit on another major trend this year that's really changing the dynamic inside the boardrooms of so many of these companies.

    Now that there are so many activist investors putting pressure on boards and CEOs for profits, and sometimes frankly quick profits, the boards and companies are looking to do deals in part to answer that out of fear, frankly, that you know what? Their jobs could be on the line because these activist investors could mount proxy contests to kick them out.

    That's also led to some of these breakups of these companies, with all this pressure from these activists, who have become much more involved than they ever have before. A lot of these folks are scared. And, by the way, making a deal oftentimes creates a sort of honeymoon period, a 12-to-24-month period where they can look at the investor and say, we're doing something, give us a little bit of time.



    And how about that all the deals aren't actually going through, in the sense that I remember Rupert Murdoch wanted to make a play for Time Warner or SoftBank was interested in T-Mobile for a little while, but got sort of spooked by regulators?


    One of the other major trends of 2014 has been the regulators and the sea change in Washington, which has been a bit more reticent about transactions.

    We're waiting to see whether a number of deals will cross that finish line. Other deals have been held up. And then you have folks like Rupert Murdoch at what the Fox — the 20th Century Fox corporation going after Time Warner. That deal did not go through in part because they withdraw that offer.

    But a number of the pharmaceutical deals, which were led by this tax idea, this inversion idea that they could change their headquarters and create a new sort of citizenship in another country, some of those deals have blown up because the regulators have said, you know what? We're not going to allow that to happen.


    All right, Andrew Ross Sorkin, thanks so much for joining us.


    Thank you. Happy holidays.

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