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Be a Stock Market David against Merged and Acquired Goliaths

3 July 2006 - Features - Editor

Media savvy and self-appointed analysts abound in every stock market environment. Some of them behave more like spokespeople or even as promoters of executives who cultivate high profiles, than as responsible purveyors of the public good. Retail investors have to read between the lines when such people make statements, for they could be loaded with euphemisms.

Mergers and acquisitions always make stock market news. Share holders are generally made to treat such corporate moves positively, and stocks of the acquiring or the merged company often appreciate following the news. However, these kinds of moves are complex and involve detailed crystal ball gazing in to the future. Individuals, who operate directly on a stock market, may discover on analysis that a merger or an acquisition is not necessarily in the best future interests of an entity which they own in part. Equity structures may favor them against block interests, but that should not prevent them from expressing opinions with conviction. It could also be time to exit such stocks! Here are some key considerations to spot stock market moves to buy, sell and join companies which can hurt small investors.

  • CEO egos: Watch out for grandiose statements of 'global presence', growth and size. Companies which choose the easy path of expansion by swallowing some of their competitors, rather than deploying superior marketing to gain market share, could well be merely playing up to the egos of top executives. This is especially likely to be the case when a cash-rich company's sales growth slows down. We have to ask: is the management prevaricating about bad times on the horizon? Protracted negotiations are another bad sign, for managements can be goaded in to paying more than they had planned simply because they fear loss of face if they let go!

  • Killing brands: Regulators routinely ask merger candidates to drop products to prevent the new entity from garnering a dominant market share. Though this is ostensibly in consumer interest, it can work out to be a most anti-competitive move in real life. Companies routinely undervalue brands about which they lack first-hand knowledge, and may jettison some out of sheer negligence. Share holders of companies which acquire brands should be happy if managements have ambitious growth plans for them, but there is nothing to rejoice if merged brands are put on back benches or even cold storage! Share holders of companies which surrender brands are inevitably at loss. High technology product lines are most vulnerable in this regard because the best financial analysts may not understand the value of know-how at all!

  • Cultural compatibility: Choosing people who will stay and picking on others who should leave, is a trauma of mergers and acquisitions that can even hurt hearts of steel! The process is always subject to errors of judgment, and widespread disaffection, distraction and distrust are common fallouts. The best companies take years to recover completely from the shock of different styles of work coming together. You do not want your dividends to wait for all this to unfold, and need to be convinced about the merits of staying invested in companies which seek shortcuts to organic advance of their enterprises.

Mergers and acquisitions are not inevitable panacea for ailing companies, especially for the sold out side! Take a close look at revenue projections on which these major investments are based, and their underlying assumptions. Get out of the stock if the management is not forthcoming, if analysts mouth homilies without hard numbers, and if the valuations do not make opportunity sense for you.

We would love to hear of your experiences on this matter at our forum!

 


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