Stock Market Guide to Mergers and Acquisitions
Are we blinded by the publicity blitz which hits the stock market whenever there is some Merger and Acquisition activity? When did you last see a Net Present Value comparison of acquisition versus an organic growth alternative? Could the objectives of acquisition have been met through a strategic partnership? Has an executive team or a promoter taken off on an ego trip with your money?
The principles of investment decisions require searching questions for which answers are hard to come by in the mainstream media. There is no stock market rule, which obliges management teams to make public their audit reports of what happened to mega investment projects after the dust of public interest settles down. However, investors who use the rigor of opportunity accounting could often switch loyalties to companies which focus on organic growth.
The assets of acquisition seem to occupy more stock market attention than the liabilities, or at least that is how most financial analysts in the media seem to think. Small retail investors have to depend on large financiers and governing boards to ask the right questions before a company makes irreversible commitments for large amounts of capital. However, it makes sense for the small guy to ask the difficult questions for whenever an opportunity presents itself, or to exit ownership, if satisfactory answers are not available.
There are several disturbing aspects of acquisitions and mergers, which are typically glossed over when management teams make their proud announcements. What about loss of know-how when disgruntled employees leave? Have the costs of voluntary retirement schemes been built in to the acquisition costs, or will they be touted as cost savings during a future quarter? What will happen to product and public liability claims which arise in future due to the past operations of an acquired firm? How will value systems and corporate cultures merge, and could the acquirer lose something precious in the process of amalgamation?
Independent stock market interests have to crunch the numbers on alternatives, before they join a bandwagon of cacophony praising acquisition as though it is a kind of achievement in its own right! You could find research and marketing personnel in an acquiring company with many fine ideas, which would leap frog a company’s fortunes much further and faster than the exaggerated and projected benefits of an expensive acquisition. Most of the strategic market access and cost benefits of an acquisition or even of a merger could have been realized through a durable negotiating process for a business relationship, without sitting on an outsider’s board. You do not need to marry or to live together for intense relationships! This is not to say that all M&A activity is bad, but to underscore the point that small investors have rights to know in detail of the thinking which has gone in to such major decisions.