How Many Companies Will Make Dumb Acquisitions?
Recently the amount of M&A activity has substantially increased -- but how many of the propositions will actually enhance shareholder value for the acquiring firm?
Unfortunately, probably not many. According to the Wall Steet Journal, multiple studies have shown no evidence that shareholders of acquiring companies do any better than the shareholders of companies that choose to grow organically. In addition, there's the ridiculous fees that Wall Street charges for "advice" and "coordination" -- in 2007 global M&A fees were above $40 billion; in 2008 they were still above $30 billion. This is news that shareholders should pay attention to -- in the last few months alone, companies like IBM (NYSE:IBM), Walt Disney (NYSE:DIS), and Xerox (NYSE:XRX) have all announced plans to make massive acquisitions. Often times companies make plans for a buyout and the deal never goes through -- like Microsoft's bid for Yahoo! last year -- which can cost millions in legal and consulting fees.
The two positives about the recent flurry of offers: (1) many see the resurgence of corporate activity as a sign of increased confidence among both investors and executives. (2) The companies that are being acquired usually see a surge in share price and hopefully, if the merger is a good strategic fit, investors can make lots of money positioning themselves well.
As companies start to disburse more and more of the cash that they've had sitting on the sidelines, don't be surprised if we see more and more deals on the table. Hopefully there will be more good than bad.
-Jordan(TMFPhillyDot), who owns no shares