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Cash Flow Benefits for Stocks from Strategic Organic Growth (Part 2)

14 January 2008 - Features - Editor

Cash Flow Benefits for Stocks from Strategic Organic Growth (Part 1)

Corporate Ego as a Destroyer of Stock Value

Why do executives and controlling stock owners prefer inorganic growth? Emotional rather than concrete intelligence seems to rule the roost in Merger and Acquisition stock transactions! The United States started this trend when the Japanese sought to take over. India has been a faithful follower, seeing such racist overtones to rejections of overtures by its corporate darlings that they ask for public apologies when their acquisitive forays are turned down!

Similarly, divestment of government stocks in India has strong ideological overtones, with vigorous opposition from the country’s entrenched communists. Ambitious acquirers are not the only ones guilty of allowing their feelings to dominate stock investing proposals: sellers may also lose heavily if they lack the courage of the IBM team that sold its laptop business to the Chinese.

Inorganic growth proposals are also panacea for new management teams. Decisions to buy or to sell controlling blocks of stocks divert attention from executive incompetence. All Merger and Acquisition decisions operate in times frames of decades. There is no scope to ask about the recent past, the present, or even the near term. Acquisition is seen as achievement rather than as a magnification of liabilities: sales of stocks are perceived as losses of face instead of positive cash flows available for new investments.

Tips for Investigating Future Stock Value after M&A

Stock investors as a community do not lack common financial planning sense. We love stocks that we hear may be acquired, and sell stocks which are said to be thinking of diverting cash flows for inorganic growth. Yet there can always be exceptions, with durable cash flow benefits for both partners in such transactions. The key is to make retrospective and honest reviews, comparing actual numbers against projections when such stock trades are first mooted. This kind of appraisal calls for access to management accounting systems, because statutory returns do not reveal the relevant numbers.

Do you agree? Have you a better way of knowing what to do with stocks when news hits a stock market about an inorganic growth move? Is it possible for stakeholders who are not long-service and surviving employees to know who won and who lost in a stock take-over or merger? Please join the community on our discussion boards, and share your experiences and insights about Mergers and Acquisitions. We wait to hear from you!

 


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