The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Jonathan Guilford

NEW YORK, Feb 18 (Reuters Breakingviews) - A heavy-machinery deal is bulldozing conventional merger logic. H&E Equipment Services HEES.O, which supplies builders with everything from backhoes to scissor-lifts, scrapped its agreed $4.8 billion sale to United Rentals to accept a sweeter bid from rival Herc HRI.N. Despite the obvious rationale and presumed benefits of combining two peers, the buyer’s shares tumbled. It’s the latest sign of how a sputtering U.S. deal revival will expose acquisition pitfalls.

The United Rentals URI.N all-cash transaction unveiled last month included a whopping 109% premium, but H&E gave itself a window to see if anyone else would be willing to pay even more. Herc turned up with 139% over the target’s unaffected share price, using some of its own stock to get there. In so doing, it both dilutes existing shareholders and uses an expensive currency. The Herc enterprise trades at just 6 times expected EBITDA over the next 12 months, according to Visible Alpha, below that of many competitors.

It's probably one reason Herc lost as much as 14% of its market value on Tuesday. Although boss Larry Silber expects to generate $125 million of annual cost savings and another $175 million of harder-to-implement revenue uplift a year. Even generously assuming they’re all achievable, his company’s 86% share of those synergies would net only a 7% return on investment, less than H&E’s 8% cost of capital, as estimated by Morningstar analysts.

Moreover, Herc envisions 20% more in synergies than the first buyer estimated. It’s a tall order considering that United Rentals founder Brad Jacobs is a deal maven behind multiple industrial companies and Herc lacks any such track record with sizeable takeovers.

If the anticipated surge in M&A under President Donald Trump had arrived as expected, Herc’s aggressive deal might have been lost in a jungle filled with animal spirits. Instead, January turned out to be the slowest start for U.S. corporate matchmaking in a decade, according to LSEG data, as Trump’s chaotic tariffs and budget policy agenda flummoxed CEOs and investors. Competition enforcement also may not turn out to be as lax as anticipated, with the new top competition cop reaffirming the stiffer rulebook introduced under Joe Biden’s administration.

A payoff premised on a rising valuation multiple and optimistic cross-selling requires powerful deal apparatus. Instead, Herc unearthed some big holes evident in so much M&A.

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CONTEXT NEWS

H&E Equipment Services said on February 18 that it received and accepted a rival takeover bid of about $5.3 billion, including debt, from Herc and terminated the agreed sale to United Rentals it unveiled on January 14.

Under terms of the new transaction, Herc will pay $78.75 a share in cash and 0.1287 shares of Herc stock for each H&E share, for a total consideration of about $104.59 a share. United Rentals was slated to pay $92 a share in cash, or $4.8 billion, including debt.

United Rentals said it would not match Herc’s offer, and instead withdrew and said it would collect a $63.5 million termination fee.

Guggenheim Securities and Crédit Agricole are advising Herc while Bank of America is advising H&E.

(Editing by Jeffrey Goldfarb and Streisand Neto)

((For previous columns by the author, Reuters customers can click on GUILFORD/ Jonathan.Guilford@thomsonreuters.com))