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Why Organic is better for Stocks (Part 1)

22 November 2007 - Features - Editor

Please do not hit your mouse! This is not about the green movement, but about how stocks can provide better returns through sound internal growth, as opposed to extravagant acquisitions and abdicated mergers. Purchase and sales of entire companies and lines of business are relatively new trends, regardless of their meteoritic rises to popularity amongst some circles of executives and owners of stocks. Contrast how the Chinese now control Lenovo stocks, while even a person other than a Watson could not even think of running IBM just a few decades ago! We could soon witness similar developments with respect to some of the most revered names in the automobile industry.

Japan has been careful to toe the U.S. line and to abandon the concept of life-long employment. It has also been non-invasive on the issue of taking control of the steel industry in the homeland of its ideological Guru since the end of World War II. However, not all stakeholders stand to benefit, at least not equally, when a corporation is acquired by bigger fish or even by an erstwhile competitor. Even the contrived atmosphere of equality that a merger conjures, can leave small owners of stocks in quandaries. Is good old organic growth not simpler and better?

Potential and Covert Losses for Stocks from M&A

You will, as a minor holder of stocks, be assailed with qualitative stuff, when a company engages in merger and acquisition moves. You will not know in time by law, so it is really a fait accompli when you are asked to support specific resolutions! There will be no alternatives with specifics and details for you to compare. Sensitivity analysis for key assumptions is out of the question. Take your stocks or leave them is the M&A mantra for small investors! It makes general sense to hold on to stocks for dear life if your company is about to be acquired, and to sell if you are on the shark side of the waters. Why are acquisitions most often frowned upon by management gurus?

Most M&A is now global. The multitudes of national laws, which may even be contradictory, confuse patent and monopoly issues. It has become almost fashionable for the European Union to forbid some accepted M&A consequences on this side of the Atlantic! Fortunately, regulators in India and China are willing to fall in line with whatever is dished out, but legal and statutory processes can sap the business energies of both the acquired stocks and the acquirer! This is piled on top of all the cultural and psychological hang-ups that former proudly independent employees have to swallow. Hostile take-over transactions are more efficient in this respect, because the equality concept can completely occupy executive minds while competitors look on in glee!

Why Organic is better for Stocks (Part 2)

 


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