MW Corporate mergers are often massive wealth destroyers - but a breakup can make you money

By Mark Hulbert

Rumor of a Kraft Heinz split is yet another reason to ignore Wall Street's M&A hype machine

Consider buying shares of newly spun-off companies.

Reports that Kraft Heinz $(KHC)$ is considering a breakup of its business are a clear lesson on why you should be skeptical of Wall Street's cheerleading about mergers and acquisitions.

Kraft and Heinz - two food-industry giants - merged almost exactly 10 years ago to great fanfare that the combined company would be worth more than the sum of its parts. "The complementary nature" of the two companies "presents substantial opportunity for synergies," according to the press release announcing the merger, creating an "unparalleled portfolio of powerful and iconic brands."

This marriage of equals didn't work out for shareholders, as is evident in the chart above. After destroying an estimated $14 billion in shareholder wealth over the past decade as a combined company, Kraft Heinz now is promising to unlock shareholder value by breaking up.

It would be one thing if this story were unique, but it isn't. The history of mergers of publicly traded companies has shown that - far more often than not - the anticipated synergies that could make a merger profitable "are mostly mythical," Matthew Rhodes-Kropf said in an interview. He is a senior lecturer in the finance department at MIT's Sloan School of Management and a managing partner at Tectonic Ventures, who focuses on the history of mergers and acquisitions.

"Given how common it is for synergies to not work out," Rhodes-Kropf continued, "you'd think that investors would have learned to be more skeptical."

Another reason investors should be skeptical of proposed mergers is that management usually does a worse job than the market in deciding where to invest scarce capital.

One famous study from two decades ago found that as companies become more diversified, they increasingly allocate capital toward their most inefficient divisions.

But when those divisions trade as individual companies, investors decide where to invest - and the market is hard to beat in deciding which companies will be most profitable.

A textbook illustration of how a management is a poor capital allocator is General Electric, which in the 1980s and 1990s acquired close to 1,000 companies in a wide range of industries. For the two decades prior to its 2024 decision to split into separate companies, GE's stock lagged the S&P 500 SPX by more than seven annualized percentage points.

Picking up the pieces

There is a way to take advantage of a failed merger: Consider buying shares of newly spun-off companies. Many will be undervalued, after having languished as part of a large conglomerate.

Kraft-Heinz's proposed split has heightened interest in other companies that could unlock value by splitting into parts. Four in the food industry were specifically mentioned in a research note earlier this week from TD Cowen analyst Robert Moskow: PepsiCo $(PEP)$; Campbell's $(CPB)$; Conagra Brands $(CAG)$ and General Mills (GIS). Added Moskow: "Perhaps there is more news to come on these fronts."

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

More: As Kraft Heinz reportedly weighs split, analysts say more food companies need to break up

Also read: The GE stocks are worth owning for their dividends again

-Mark Hulbert

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July 16, 2025 07:25 ET (11:25 GMT)

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