August 4, 2022

How obeying an activist investor can destroy value

Roula Khalaf | Financial Times


If you ever needed a reminder about how M&A can be value destructive, look no further than Just Eat Takeaway’s $7.3bn acquisition of US rival Grubhub.

The Netherlands-based company on Wednesday said it had to write down by €3bn the value of Grubhub, effectively admitting its consolidation strategy has failed.

There are two lessons from this.

The first is that bigger isn’t always better. JET and Grubhub believed that by creating economies of scale they could reap huge rewards. But dealmaking is tough and most mergers fail, as this study shows.

Several rigorous academic papers have also determined that combining companies has historically led to value destruction rather than creation. This paper in the National Bureau of Economic Research shows that US takeovers have led to losses worth more than $200bn for shareholders over the past two decades.

The second lesson is that the short-term strategies of activist investors are often detrimental to the broader interests of the company and long-term shareholders. In fact, this paper by Yvan Allaire at the Institute for Governance of Private and Public Organizations in Montreal shows how activists underperform passive funds.

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