What recent deal failures like Kraft-Heinz, Valeant pharma, and WeWork have in common?

Recent deal failures of Kraft-Heinz, Valent pharma and WeWork

• Recent failures in deals like Kraft-Heinz, Valent pharma and IPO failure of WeWork exhibit a common trend.
• The deal makers of these transactions – 3G capital and Softbank have inspired fear and envy in the M&A world during the last decade.
• In this blog, we will look at the hard lessons learnt from each of these deal failures.

Overview on 3G capital, Valeant pharma and Softbank

• 3G capital – A famous private equity firm has been famous for acquiring some of America’s biggest companies.They are famous for agressively cutting costs and squeezing jobs.
• Valeant Pharmaceuticals had acquired drug makers recently and increased the prices of the drugs thereby fueling outrage.
• SoftBank – The famous VC firm that has invested on the likes of Uber and We Work continues to be one of the most powerful forces in Silicon valley.

Strategies of the Kraft-Heinz, Valent pharma and WeWork

• The above firms adopted very different M&A strategies. Their strategies were widely respected and revered by investors in the Wall street.The reality turned out to be very different.
• In any M&A transaction, there will be a gap between the buyer and seller on the value of the target company. In addition, many recent IPOs suggest that there also exists a gap between what the VC thinks about the value of its investment and what the public investors perceive.Many recent failures in IPO like Uber and We Work are a testimony to that.

3G failure in Kraft Heinz deal

• In case of 3G, the firm rose into prominence after cobbling together Anheuser- Busch InBev which is the world’s largest beer maker.After that it acquired Burger King and Tim Hortons.
• Its last transaction was the merger of Kraft Foods and Heinz to create the world’s largest food company.This turned out to be disastrous idea.
• 3G tried and tested strategy of combining companies and then cutting costs failed miserably at Kraft Heinz.3G intent to acquire Unilever for $143 billon was rebuffed by Unilver management and since then things started going downhill for the company.
• The company took a $15.4 billion write down which further plunged the stock value by more than 70%.

Valeant Pharmaceuticals failure

• Valeant pharma had a weird strategy that drug makers like them should not be making drugs.Instead its strategy was to acquire its rivals and then increase the prices of the drugs.At the same time, it also would resort to massive layoffs.The firm found success in this strategy and hence repeated it for its other buyouts.
• The turning point came when Valeant Pharma took an ambitious bid to acquire Allergan – The company known for making botox for $54 billion.The bid was rejected.
• Inspite of this, Valeant went on a buying spree acquiring drug makers like Salix and Sprout.These buyouts increased Valeant market cap to $90 billion.
• After 2015, things started going wrong for Valeant.Accounting irregularities, debts and political resentment over increasing drug prices destroyed the company.Valeant has since then lost 93% of its market cap and has renamed its company to Bausch Health.

The curious case of WeWork and Softbank

• Softbank had its worst run in 2019.The kingpin of startup investments had staked billions of dollars in its three major companies – Uber, Slack and We Work.
• Uber had lost 33% of its value since its IPO.Slack meanwhile had lost 35% of its IPO value and We Work is facing problems right after its filing.
• All these IPO failures had changed the perception of public investors over its confidence on tech unicorns and increased doubts on its sky rocketing valuation.
• These failures could restrict Softbank’s access to its future funding.It also has taken a hit to its ambitions of creating a future of human-robot harmony.
• One thing has emerged from this fiasco.It will stop the loss making companies to go public with a hope that it will turn profitable soon.

Conclusion

• There is a lot to learn from the failures of deals like WeWork, Valeant pharma and Kraft Heinz as all three companies had a sloppy accounting practices.For We Work, it was bad Corporate Governance and its willingness to put up with weird practices of its founders.