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When dealmakers fail: Lessons from 3G to Softbank

By Ed Hammond  /  Bloomberg

Bottles of Heinz Ketchup sit on a shelf in a supermarket in Pittsburgh, Pennsylvania, on Feb. 21 last year.

Photo: AP

They are the big dogs of modern mergers and acquisitions (M&As) — rapacious dealmakers that have devoured mighty corporations, bankrolled young disrupters and upended entire industries. And they are not looking so tough anymore.

Since 2014, when the latest wave of mergers and acquisitions began to build, three names have inspired fear and envy in the M&A world. In doing so, each has been totemic of a particular vogue in the capital markets:

3G Capital, the Brazilian investment firm that has picked off some of the US’ most famous brands and aggressively squeezed out costs and jobs; Valeant Pharmaceuticals, the ill-fated Canadian company that gobbled up drugmakers, drove up prices and fueled outrage over high prescription costs; and Softbank Group Corp, the big-dreaming — and big-spending — Japanese conglomerate that has backed the likes of Uber Technologies Inc and WeWork and remains one of the most powerful forces in Silicon Valley.

From the start, the three M&A powerhouses adopted wildly different strategies.

However, for any investor, the similarities deserve attention. Wall Street believed them and their many imitators to be exceptional. Turns out, they were not, and are not.

That is worth remembering at a moment when financial world is struggling to come to grips with the yawning gap between what the pros think companies are worth and what those companies actually fetch on public markets — see WeWork’s botched initial public offering.

Not long ago, 3G, cofounded by billionaire Jorge Paulo Lemann, seemed unstoppable. Lemann became a global name by cobbling together the world’s biggest beermaker, Anheuser-Busch InBev; picking up brands like Burger King and Tim Hortons; and driving the 2015 merger between Kraft and Heinz to create one of world’s largest food companies.

3G has since stumbled — hard. Mixing Kraft Foods Inc and HJ Heinz Co turned out to be a disastrous idea, and not just for those two companies.

The investment firm’s usual combine-and-cut formula failed miserably at Kraft Heinz Co.

Since Lemann teamed up with none other than Warren Buffett to do the deal, sales and profits have tanked. 3G’s dream of turning Kraft Heinz into the savior of Big Food ended when Unilever rebuffed its US$143 billion takeover offer in 2017.

In February, Kraft Heinz took a staggering US$15.4 billion writedown. The company’s stock has plunged more than 70 percent from its peak, helping to drag down rivals like Kellogg Co, Campbell Soup Co and General Mills Inc.

Former management consultant Michael Pearson had a similarly radical idea at Valeant: that drugmakers like itself had no business actually making drugs.

Instead, it would borrow money to acquire rivals, dramatically increase the price of their treatments and fire almost everyone. Rinse, repeat.

Valeant’s ambition peaked in 2014, when it teamed up with activist investor Bill Ackman to mount an audacious US$54 billion takeover offer for Allergan PLC, the maker of Botox.

The bid was spurned, but Ackman and Pearson were undimmed and, as if to prove their theory, took the company on a buying spree that included gastrointestinal drugmaker Salix Pharmaceuticals Inc (US$11.1 billion) and Sprout Pharmaceuticals Inc, a developer of female libido stimulants (US$1 billion).

For a while investors approved, sending Valeant’s market value to US$90 billion in August 2015. Then things went spectacularly wrong.

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