M&A Today: Discipline in the Board Room — Lessons Learned When M&A Deals Unwind

Jeff (00:02):

Welcome to Solomon Connects. This is our Mergers & Acquisitions monthly podcast where we break down the key market forces shaping deal activity. I’m Jeff Jacobs, head of M&A and COO of investment banking at Solomon Partners.

Chris (00:14):

And I’m Chris Moynihan, a director in the M&A group. Today we’re exploring an emerging theme in corporate M&A, what’s called M&A reversals. Jeff, to kick things off, let’s define the trend that we’re seeing. What exactly is an M&A reversal and why are we seeing more of them now?

Jeff (00:31):

Well, Chris, while it’s something we’re definitely seeing more of lately, it’s actually not unique in M&A history. We’re used to seeing companies build empires, right? Acquire businesses, gain share, but not all of them work out. And what we are seeing more of recently are these M&A reversals, or essentially an unwind of a previously acquired business. They can take various forms. It could be a sale; it could be a spinoff to shareholders.

But I think to understand what’s driving them today, you really need to look back at some of the past deals done, particularly some of those big transformational bets that were made where the assumptions that drove the combination cost synergies, cross-selling scale advantages haven’t necessarily held up in today’s market.

Sometimes a sector has evolved in a different way than expected. Sometimes macro factors reshape the environment in a way that maybe no longer aligns with the original thesis for a deal, and frankly, sometimes it’s simply internal factors that haven’t come together, integration that hasn’t gone smoothly, cultural clashes and inability to de-lever as quickly as expected. And in a world where agility and focus matter more than just size boards are increasingly asking, are we better off apart?

Chris (01:49):

So, you mentioned some of the reasons, but let’s dig into that a little bit more. What are the key reasons that boards are considering unwinding larger mergers?

Jeff (02:01):

Well, look, as the saying goes, breaking up is hard, and there’s certainly a few recurring themes. The first is debt. Many of these deals refinance pretty aggressively, sometimes as a necessity. You remember some of the frothy evaluations we’ve seen over the last few years, and when performance lags, the balance sheet can become a liability. Some of these companies are pretty levered, which can be unsustainable when those debt costs get elevated and cashflow is declining. Kraft Heinz was an example. We saw that mega deal really struggled to deliver growth, and now the company is shedding assets to refocus and stabilize its financial footing.

Another common issue is strategic misalignment. Combining two businesses doesn’t always mean their brand cultures or operating models will mesh. Look at Warner Brothers Discovery. That was another big bet on streaming. There was reportedly some internal friction and shifting priorities that left that combination unsustainable, but it doesn’t have to be that dramatic.

(03:08)
Sometimes the initial synergy assumptions, for example, cross-selling to customers don’t bear out. And market shifts can also play a role, right? Consumer preferences, technology and competition all evolve quickly as we know. And maybe what looked like a smart move five years ago doesn’t make as much sense in today’s market.

Another example is Keurig Dr Pepper. That was a merger combination that’s now unwinding into two separate platforms, essentially to better align with what we’re seeing as changing consumer tastes in the beverage space. And we know for public companies, investors’ scrutiny always, always plays a role, right? Acquisitions need to enhance shareholder value. And if a combination doesn’t ultimately boost that share price, it is absolutely going to invite pressure and going to invite scrutiny from both investors and from analysts, which in a very public way can be a call out for boards to reconsider their original thesis and really start to entertain the idea of a divestiture.

Chris (04:13):

You touched on some notable examples. What do they tell us about how boards are thinking differently?

Jeff (04:18):

They’re really a wakeup call, right? All of the examples we’ve been discussing show a shift in mindset. Boards are realizing that complexity can actually dilute performance, and that unlocking values sometimes means simplifying the structure. These moves aren’t an emission of failure. They really are just strategic recalibrations.

Chris (04:38):

And what’s really driving boards to make these moves? Is it just strategy or is the market forcing their hand?

Jeff (04:44):

I do think market forces often start the conversation, right? When a company stock consistently underperforms, especially over multiple years, boards have to respond. Between the Kraft Heinz merger, back in 2015, roughly a decade ago, to today, when the board decided to reverse the merger, the stock was down over 60%. And by the way, that compares with a massive gain in the S&P over the same period. So that kind of gap, that’s not just disappointing, that is unsustainable. We saw it with Warner Brothers Discovery too. They had a similar trajectory where the stock fell post-merger, even as the broader market climbed. So those are signals that the strategy isn’t resonating, that synergies aren’t being captured, and investors are going to lose patience in those circumstances.

Chris (05:31):

Before a board signs off on a merger, what should they be thinking about? Are there specific strategic or financial signals that they should be considering to stress-test their assumptions and ensure they don’t end up in one of these M&A reversal scenarios?

Jeff (05:46):

I think there are a number of factors that boards should consider. For starters, boards need to understand the strategic rationale behind a deal and whether it still holds up in a changing environment. So that means asking whether the merger truly aligns with the long-term goals or if it’s simply chasing scale for the sake of size.

Integration is another critical piece. Cultural compatibility, operational alignment, realistic synergy assumptions, all of those are often overestimated in the excitement of a deal. And if those pieces don’t fit, the merger can quickly become a drag on performance.

Lastly, I would say optionality matters. If the deal doesn’t deliver, is there a clean path to unwind or to restructure? Too often deals are driven by ambition rather than discipline. Boards should stress-test the thesis, model downside scenarios, as we always do, and be honest about the execution risk. And investors need to look past the headline numbers to assess whether the combination actually creates sustainable value.

Chris (06:51):

So, thinking about where we are today, where we’ve seen a lot of mega mergers over the last year, do you think that M&A reversals will increasingly become more common? Or are these just isolated cases from the past that are tied to unique circumstances? What should deal makers be watching out for in this next wave of large-scale acquisitions?

Jeff (07:10):

I wouldn’t be surprised to see more in the future. We’ve seen a record number of mega-deals this year. Amazingly, over 50% of M&A volume in the US has come from these deals, $5 billion and up. And while many of these combinations will certainly deliver on their strategic promises, history suggests not all are going to stick. And companies are under pressure to deliver not just growth, but efficient strategic growth. So, if a merger doesn’t support that, boards are increasingly willing to reverse course. It’s a sign I think of maturity, not weakness. And for dealmakers, it’s obviously a reminder that the best deals aren’t always the biggest, but they need to be the ones that fit best.

Chris (07:52):

That’s great advice. Thanks Jeff. And thank you to everyone tuning in. Be sure to check out Solomon Partners.com for more insights, and we’ll be back next month with another M&A update.