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Signs of Stock Market Discord!

24 September 2006 - Features - Editor

It happens to the best companies, but that is no consolation when it happens to your important investments! Acquiring a major rival has worked in the past, mainly in sectors with relatively low growth. Consolidation of expenses is the best way to boost profits in a mature market.

The formula is not quite as attractive when companies of nearly similar sizes merge, or when acquires another just before times of exponential demand growth. Resources are better deployed in such times to sharpen the knives of technology, and aim for secure market shares in the best segments.

Acquisition of a competitor can make some sense if some kind of distress sale is on the cards, with the possibility for a company with staying power to pick up a bargain. Quick pay backs are also possible if a competitor has a revenue line which an ambitious acquirer cannot hope to have in organic form. However, the present value and the opportunity cost of expensive acquisitions do more for management egos than for small investor returns!

That is why news of Vivendi's move to buy its rival Bertelsmann for a whopping amount of over 1.5 billion Euros may not be as exciting for small share holders as some analysts like to make out. It could be the best part of two decades before the investment is fully covered by additional net revenues. That is a long time for today's rapidly evolving music publishing business!

Regulator clearances in key markets may require the combined company to shave some product lines in order to stay within competition norms. That would be a pity from the value addition stand point, and may not augur well for the profitability ratios. It would great things for the top line though, and help to close the psychological gap with market leaders. That is why the marketing attractions of this deal glitter more than the financial aspects!

Vivendi's stock holders have been accustomed to superior returns, and the new management team for the combined company could have a hard time meeting profit and dividend expectations on a sustainable basis. Perhaps they have some math that we have missed!


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