Smurfit shareholders may regret WestRock merger

Multiple studies have found that most mergers fail, typically because the acquiring company has overpaid

Smurfit Kappa shareholders have endured a tough time lately, with the stock falling 10 per cent after it revealed the terms of its proposed merger with US packaging rival WestRock.

Chief executive Tony Smurfit responded by predicting shares “will come back strongly” when investors see the “potential benefit”. Certainly, there are potential positives.

If the deal goes ahead, says Smurfit, most of the company’s business will be in the Americas, justifying a US listing that should drive a higher valuation multiple.

The timing looks good. Like other paper producers, WestRock shares had fallen back to pandemic lows, roughly halving since 2021′s peak. Smurfit is targeting synergies of over $400 million (€375 million) annually. That’s ambitious; if achieved, it would go a long way to justifying the deal.

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However, market concern is understandable. Smurfit is paying a 36 per cent premium to where WestRock was trading before the companies revealed they were in talks – much greater than what markets were expecting, as evidenced by the share price sell-off.

Multiple studies have found that most mergers – up to 83 per cent, according to one KPMG study – fail. Shares in the acquiring company typically underperform, mainly because they overpay. Indeed, WestRock shares have underperformed since going public in 2015, partly because its own history of acquisitions has resulted in a sizeable debt burden. As renowned valuation expert Prof Aswath Damodaran has put it, the “collective evidence” indicates that an acquisition is “the most value-destructive action a company can take”.

As for synergies, research indicates they are the most common justification for big deals, but they usually fall well short of expectations. Synergies may also be limited in this case, notes Morningstar, given most of Smurfit’s sales are in Europe, while over 80 per cent of WestRock’s sales are in the US. Obviously, some mergers do work. This may be one of them, but investors have yet to be convinced.

Proinsias O'Mahony

Proinsias O'Mahony

Proinsias O’Mahony, a contributor to The Irish Times, writes the weekly Stocktake column