If someone wants to buy a company you own stock in, do you break out the champagne? Not necessarily. Given today’s burgeoning mergers and acquisitions, investors should approach M&A news with caution. Too many go wrong lately, punishing share prices and investors.
Numerous studies show that the qualities takeovers promise – empowering symmetries and expanded market reach – often don’t pan out: 83% don’t meet their goals. The classic case of a botched deal was Daimler’s 1998 purchase of Chrysler. The German automaker encountered nothing but headaches and unloaded the Detroit company a decade later, suffering billions in losses.
Then there are the proposed unions that fizzle. Withdrawn deals in 2014 were at the highest level since 2008, when a vicious recession started. Scotched match-ups include the AbbeVie (ABBV) quest for Shire (SHPG) in pharma, Yara (YAR.OL) for CF Industries (CF) in fertilizer and Iliad (ILD.PA) for T-Mobile in telecom.
As of year-end 2014, the volume of U.S.-targeted M&A stood at $1.6 trillion, the highest year-to-date volume on record and up 43% from December 2013. Nowadays, corporations that horded cash and disdained investing during the recession now, rather than plow the money back into their operations, seek to grow through buying the other guy.
As for these companies’ stocks in your portfolio, the daily market price depends heavily on what a willing buyer and seller agree on. Huge distortions and disagreements can arise on what a share ought to fetch in the open market. After more than 25 years of working with the financial markets, I can assure you there are many occasions when stock prices simply don’t reflect the reality of the underlying company.
The target company’s board of directors usually makes the final determination on the deal, and in most cases either accepts or rejects a purchase offer, then negotiates the terms for cash and stock and the ultimate buying price. Both acquirer and target companies’ stocks typically surge immediately after a purchase offer; the target’s stock often drops after the deal.
Recently, for instance, the oil-industry firm Halliburton (HAL) made an offer to buy competitor Baker Hughes (BHI) for slightly more than $34 billion dollars. The initial offer sent Baker Hughes stock up more than 15%. Why?
Control is pricey. When you shoot for complete control, you often pay the biggest bucks to make an offer others will accept. Not everyone is a willing seller; even eager sellers usually drive hard bargains. Often buying an entire company means buying out all shareholders – and obviously not everyone wants to be bought.
Yet as an investor, you essentially get (for a while, anyway) what others are willing to pay for a company. When you own just a few shares of a company stock, you wield little influence on the direction of the company, which can translate into lack of control over the direction of your own portfolio. If you’re like many small investors, you may feel frustration when you hang onto shares while watching a stock’s prices soar and then nosedive in the wake of a deal.
Post-deal stock prices also often drop, sometimes due to such unforeseen problems as integrating different workplace, lost productivity during management power struggles, additional debt or expenses to make the purchase and accounting issues that weaken the takeover company's financial position.
Mergers often ignite other, subsequent debates: downsizings, firings, office closures. With luck these draconian moves produce performance efficiencies for the acquiring company. To put it bluntly, the job of the board is to run the company as profitably as possible for all shareholders.
As investors we need to understand how mergers and acquisitions influence our portfolios. Our best move as stockholders may be cautious patience – not to mention hope – that the deal will benefit our stock eventually.
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Joseph “Big Joe” Clark, CFP, is the managing partner of the Financial Enhancement Group LLC, an SEC Registered Investment Advisory firm in Indiana. He teaches financial planning at Purdue University and is the host of Consider This with Big Joe Clark, found on WQME and iTunes. He is a Registered Principal offering Securities and Registered Investment Advisory Services through World Equity Group, Inc, member FINRA/SIPC. Big Joe can be reached at firstname.lastname@example.org, or (765) 640-1524. Follow him on Twitter at @Big Joe Clark and on Facebook at http://www.facebook.com/FinancialEnhancementGroup.
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