February 28, 2019

Breakingviews: Germany’s Merck chips into aggressive M&A game

by Breakingviews.

Germany’s Merck is chipping into the aggressive M&A game. The drugs and specialty-chemical supplier is making an unsolicited $5.2 billion offer for Versum Materials. It’s the second big cross-border deal in as many days hoping to nix an agreed tie-up. It’s another sign that recent market wobbles have not yet dulled merger mania.

This week has been peppered with big, risky and odd deals. On Monday Canada’s Barrick Gold made a quixotic $18 billion hostile offer for American rival Newmont Mining. Barrick’s proposal is not particularly persuasive financially, is conditional on the target abandoning its takeover of Goldcorp – and Chief Executive Mark Bristow and his team are busy integrating a deal that only closed last month.

Roche, meanwhile, dialed up its clinical risk by agreeing to pay $4.3 billion for Spark Therapeutics to pursue the promising, yet largely commercially untested, field of gene therapy.

The largest deal of the week looks more conventional. Danaher is to take part of GE’s healthcare business off the conglomerate’s hands for $21 billion. Both companies’ stocks rallied sharply on the news, implying each side’s shareholders are optimistic they’ll be better off.

Merck’s move looks sensible enough in isolation, as both it and Versum produce specialty chemicals. That helps justify paying more than the existing deal. The target’s growth supplying chipmakers with materials should be strong over the long run, and Merck should generate a return on investment above its cost of capital if everything goes right.

However, cross-border deals are generally riskier – and unsolicited ones more so, as the lack of cooperation can lead to unforeseen problems and irritation between the two organizations. Moreover, while Entegris executives reckon they can find $75 million of cost savings in one year, Merck is targeting three times as long to eke out slightly less.

Furthermore, the proposed deal will lever up the buyer’s net debt from around two times EBITDA to nearly three times. Boosting borrowing to buy a supplier to a cyclical industry leaves a buyer even more a hostage to economic fortunes. That, though, is another consideration that goes by the wayside when M&A gets punchy.

_____________________________________________________________________

Request a free trial of Breakingviews here

Article Topics

Get In Touch

Subscribe