By Mark Hulbert

Researchers find most mergers historically have destroyed value. And this deal in particular would face numerous hurdles.

Elon Musk said Tuesday that special committees at SpaceX and Tesla have been formed to explore a merger.

Wall Street is all abuzz over a possible merger between Tesla and SpaceX. But there is a high probability that such a merger would be a bad idea.

That's according to Feng Gu, a professor of accounting and law at the University at Buffalo School of Management. Gu and Baruch Lev, a professor of accounting and finance at New York University, are authors of the recently published book "The M&A Failure Trap." In that book they reported on their research that found that roughly 70% to 75% of the 40,000 M&A deals between 1980 and 2022 were failures - as judged by the merged company having a lower market cap after three years than what the uncombined companies would otherwise have been worth.

In an interview Wednesday afternoon, Gu said that a Tesla (TSLA)-SpaceX (SPCX) merger would not be immune from these long odds, for a number of interrelated factors:

• Large size. Gu and Lev reported in their book that sizable deals - and a Tesla-SpaceX merger would far and away be the largest in history - have even higher failure rates than the historical averages would already suggest.
• Questionable synergy. Never in history has there been a proposed merger for which proponents didn't claim huge synergies and corresponding cost savings - and a potential Tesla-SpaceX merger is no exception. But those synergies often don't materialize, and Gu said that in the case of these two Musk-led companies "the synergy story is not obvious." That story is based on the narrative that Tesla and SpaceX are both becoming AI companies, but Gu points out that, for the moment, the bulk of Tesla's business is focused on cars and battery storage. And even if Tesla does become a predominantly AI company, it could take a long time for that to happen. Gu reminds us that it's been nearly a decade since Musk promised the second-generation Tesla Roadster would be available - and the clock is still ticking.
• Conglomerates face particularly stiff headwinds. Conglomerates - mergers of two companies in unrelated businesses - have poorer odds of success even than those suggested by the historical averages. Though proponents of a Tesla-SpaceX merger argue that the combined company would not be a conglomerate, Gu is not so sure. "What these two companies have in common is a bunch of AI-related projects with doubtful synergies." If the companies remain separate, investors would decide which projects are most deserving. If and when combined, in contrast, the market would no longer be involved - company management (Musk) would. Historically, the market has done a better job than CEOs of deciding where to allocate scarce resources among competing projects.
• Regulatory challenges. Gu points out that Tesla has substantial operations in foreign countries, including China. Upon being merged with SpaceX, the latter company's technology would potentially be available to those foreign governments. Getting necessary regulatory approvals is not at all assured.
• Investors are betting that SpaceX will grow faster than Tesla. This contrast has taken center stage this week, as SpaceX reported much-faster-than-expected growth and Tesla reported flat revenue. In an email, Gu pointed out that "if these two companies are merged, the slower growth trajectory of Tesla's car business will drag down the overall growth rate of the combined entity." Why would SpaceX's investors approve of that? To be sure, since Musk is a controlling shareholder in SpaceX, this concern is somewhat hypothetical. But if a merger went forward anyway the company could face legal challenges from disgruntled SpaceX shareholders.

The bottom line? M&A expert Aswath Damodaran, a finance professor at New York University, several years ago declared that acquisitions are "the most value-destructive action a company can take." Take note if you're excited about a potential Tesla-SpaceX merger.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

-Mark Hulbert

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