If you don't remember the late 1990s, it's hard to overemphasize the irrational exuberance (to quote the then-chairman of the Federal Reserve, discussing a slightly different phenomenon) speculators had over the so-called "New Economy." Anything even remotely connected with the strangely magical new word "internet" warranted lots of attention and money. Even if the underlying company's business model made no sense. (Like Kozmo, a delivery service with no user fees and no minimum purchases. Want a 49 cent pack of gum from the neighborhood convenience store, but don't want to leave your couch? They'd deliver it to you. Within an hour.)
The New Economy, such as it was, brought upon a series of multibillion-dollar acquisitions not previously seen. From Yahoo!'s 1999 $6 billion purchase of Broadcast.com to @Home's almost $7 billion purchase of Excite, companies were interested in growth now, profitability later (if ever). In the first few weeks of 2000, such acquisitions reached their zenith.
AOL and Time Warner
AOL, the most publicized online service of its day, had built a then-remarkable subscriber base of 30 million people by offering a software suite (available on compact discs!) that entitled users to hundreds of free hours. Yes, internet usage was measured in hours back then, and you'd have to use the service 24/7, for a month at a time, to take advantage of the offer in its entirety.
Meanwhile, Time Warner was decried as an "old media" company, despite having tangible businesses (publishing, television, et al.) and an enviable income statement. In a masterful display of overweening confidence, the young upstart purchased the venerable giant for $164 billion, dwarfing all records. The relative importance of the two companies was revealed in the new entity's name, AOL Time Warner.
Two years later, AOL Time Warner lost $99 billion. The new company's market value fell by $200 billion, or significantly more than the size of the original acquisition. AOL would have been better off withdrawing 350 million $100 bills and setting them all on fire. A few years later, the companies cited irreconcilable differences and ended the marriage. Today Time Warner is a $33 billion company; its erstwhile purchaser a $2.5 billion operation.
Vodafone and Mannesmann
Yet AOL's ephemeral takeover of Time Warner is merely the Western Hemisphere's record holder. A few months earlier, British telecommunications company Vodafone completed a rancorous if not completely hostile takeover of German wireless provider Mannesmann. The Vodafone/Mannesmann deal cost $183 billion, in 1999 dollars - or more precisely, $183 billion in 1999 Vodafone stock. Vodafone offered and Mannesmann ultimately accepted. The deal would have been historic even without the superlative currency figure, as it represented the first foreign takeover in modern German history. Today, Mannesmann survives under the name Vodafone D2, operating exclusively in Germany as the wholly owned subsidiary of its U.K. parent.
Worldwide acquisitions have tailed off considerably in the ensuing decade. The value of all corporate acquisitions in 2011 was lower than the corresponding number from 14 years earlier. In fact, the largest proposed acquisition of the past 12 months never even got off the ground. Similar to the Vodafone/Mannesmann deal, it would have involved America's second-largest mobile provider, AT&T, buying number four T-Mobile for $39 billion. (Continuing the parallel, T-Mobile is a subsidiary of Germany's Deutsche Telekom.) Even though the deal was endorsed by parties as diverse as major special interest groups, most state attorneys general and multiple labor unions, the U.S. Department of Justice cited antitrust reasons and sued. The principals pulled out, leaving a far less publicized deal as the biggest buyout of the past year.
Last summer, St. Louis-based Express Scripts purchased Medco for $29 billion. Both companies administer prescription drug programs, process and pay claims, and indirectly act as bulk purchasers for their millions of customers. Since the acquisition, it's estimated that one in three Americans now falls under the Express Scripts aegis.
Still, it bears mentioning that the largest acquisition of 2011 was barely one-sixth the size of the largest from a dozen years previous.
The Bottom Line
Will we ever see acquisitions like the record breakers of yesteryear? If we do, such takeovers will likely be grounded more in fundamentals than in speculation. After all, pharmacy benefit management is about as unglamorous an industry as there is, especially when contrasted with the wild technology upstarts of the turn of the century; but Medco represented unmistakable, tangible value. Its business model fit seamlessly with that of its purchaser, and Express Scripts didn't have to incur massive debt, nor offer dubiously priced stock, to swallow Medco whole.
Capitalism feeds off itself, almost by definition. The profit-seeking seeks the profit-seeking. As long as economies of scale exist, and as long as acquisition represents a quick path to growth, multibillion-dollar buyouts will continue to be a part of a business landscape that's perpetually under construction.