A corporate merger is a lot like a marriage — except marriage has a better chance of working out…
The numbers are simple. Divorce rates in the United States are hovering above the 50% mark. Conversely, a 2004 study by Bain & Company came to the conclusion that 70% of corporate mergers actually destroyed shareholder value.
Gee, isn’t one of the main arguments for a merger that it will enhance shareholder value?
Oops!
And, of course, merger mania only seems to strike when markets don’t have any better reason to go up (AOL-Time Warner merger back in 2000, anyone?). No wonder there’s always consistent overpayment going on…
Merger mania is one facet of an overall speculative mania currently going on — and owning shares of the next buyout candidate is the hottest lottery ticket you can buy in your retirement account.
After all, we didn’t see Disney’s offer to buy Marvel six months ago – when they could have offered half the price they paid just a few days ago.
What value do they see now? Guess that’s part of the ole Disney “magic.”
Marvel Entertainment: Can You Find Where the Value Magically Appeared?
The same logic applies to Kraft’s offer for Cadbury. If Cadbury is such a good buy, why didn’t Kraft make an offer at $40 six months ago? Or even at $35.
I’ll tell you why: the mood in the markets was so pessimistic then that any offer above the current price might have been considered overpaying.
Of course, Cadbury rejected Kraft’s offer for being too low. I can’t tell who the pot is and who the kettle is on this one.
Game over for this market, folks – greed is back!
There’s always a lesson from merger mania. I’ve had a couple of stocks get buyout offers over the years, and I’ve never regretted selling my shares, taking my cash, and moving on.
If you think about it, a merger is usually more like a divorce than a marriage – you end up poorer.
Stay Sovereign,
Andrew Packer
Editor of Credit Crunch Short Report
Source: Sovereign Society