Mega Mergers on the Rise: Why Big Deals Still Struggle to Deliver Returns

As mega-mergers make a comeback, history suggests they often underperform. Discover why corporate giants struggle to justify their billion-dollar acquisitions.

The world of corporate mega-mergers is poised for a resurgence in 2025. As interest rates stabilize and regulatory bodies ease restrictions, the landscape is primed for large-scale acquisitions. However, history provides a cautionary tale—many of these billion-dollar deals often fail to meet expectations. While investment bankers anticipate a busy year, shareholders remain wary, as past trends show underwhelming returns on massive transactions.

The Resurgence of Mega-Mergers- After a relative slump, large-scale mergers and acquisitions (M&A) are gaining momentum. Data from LSEG reveals that mega-deals—transactions valued at $10 billion or more—accounted for approximately $660 billion in 2024. Although this marks a slight uptick from the previous year, it pales in comparison to the $1 trillion peaks observed in 2019 and 2015.

The renewed activity can be attributed to several factors. Central banks in the U.S. and Europe are lowering borrowing costs, encouraging debt-driven acquisitions. Additionally, stock market growth—exemplified by the S&P 500’s 25% rise over the past year—bolsters executive confidence. Regulatory shifts further fuel dealmaking; incoming U.S. Federal Trade Commission (FTC) head Andrew Ferguson has pledged to relax merger restrictions, while the European Union’s new anti-monopoly leader, Teresa Ribera, advocates for more flexible regulations.

Why Shareholders Remain Skeptical- Despite the favorable conditions, shareholders remain cautious. An analysis of 60 mega-deals since 2020 shows that acquiring companies often underperform their industry benchmarks. Over three-quarters of these firms trailed their sector averages, with median and mean underperformance standing at 5 and 7 percentage points, respectively.

Some of the most notorious failures include Teladoc Health’s $18.5 billion purchase of Livongo Health in 2020 and the ill-fated Discovery-Warner Media merger in 2021. Discovery’s stock has suffered a 30% annualized decline since the deal’s announcement, significantly lagging behind industry peers.

Sector-Wise Breakdown: Where Deals Fail the Most- Certain industries are particularly prone to poor M&A performance. Financial services and healthcare acquisitions tend to underperform the most, with acquiring firms trailing their sector benchmarks by 9% and 10% annually, respectively.

In healthcare, high-profile missteps underscore the risks of overpaying. Pfizer’s $43 billion acquisition of Seagen in 2023 exemplifies this trend; since the deal’s closure, Pfizer’s stock has lagged the S&P 500 Pharmaceuticals and Biotechnology Index by nearly 20 percentage points. Investor concerns over excessive valuation and uncertain synergies continue to weigh on these transactions.

The financial sector faces similar struggles. Royal Bank of Canada’s $10 billion acquisition of HSBC Canada in 2022 and National Commercial Bank’s $15 billion merger with Samba Financial have failed to generate meaningful shareholder value. These lackluster performances serve as a warning for Italian banking giant UniCredit, which is contemplating a $70 billion bid for Commerzbank or Banco BPM.

The Few Bright Spots: Energy Deals Show Promise- While most mega-mergers falter, the energy sector has seen relatively better outcomes. Acquirers in this space tend to perform closer to their industry averages, thanks to more disciplined deal structures.

Chesapeake Energy’s acquisition of Southwestern Energy, forming the new Expand Energy, stands out as an early success story. The combined entity has significantly outpaced its peers, with strong cost synergies justifying the premium paid. Similarly, Diamondback Energy’s $26 billion takeover of Endeavor Energy Resources has been well-received by investors.

What Makes a Successful Mega-Merger?- The rare cases where mega-mergers succeed share common traits. These include:

• Hefty Cost Synergies: Transactions that generate substantial cost savings tend to fare better.

• Stock-Based Deals: When acquisitions involve stock swaps, both sets of shareholders share in the upside, reducing friction.

• Similar Business Models: Mergers between companies with complementary operations and overlapping markets tend to be less risky.

However, these ideal conditions are difficult to achieve, leading many CEOs to overestimate their ability to create value through acquisitions.

Looking Ahead: The Future of Mega-Deals- As we move into 2025, the appetite for large-scale mergers remains strong. However, history suggests caution. The track record of mega-mergers is riddled with disappointing returns, often fueled by over-optimism and aggressive dealmaking. While a handful of well-structured deals may break the trend, shareholders would be wise to scrutinize the fine print before celebrating the next billion-dollar buyout.

Despite a resurgence in mega-deals, the numbers paint a sobering picture. Most corporate giants fail to justify their expensive acquisitions, with stock prices lagging behind industry peers. While some energy sector deals have shown promise, the broader trend remains discouraging. As 2025 unfolds, investors and executives alike must tread carefully—because in the high-stakes world of billion-dollar mergers, the risks often outweigh the rewards.

Source: (Reuters)

(Disclaimer: This article is for informational purposes only and does not constitute financial advice. Readers should conduct their research or consult financial professionals before making investment decisions.)