Great Post! There is so much cash sloshing around these days its...

Great Post!

There is so much cash sloshing around these days its so no wonder valuations are so high.

Congratulations to all the holders who benefited form this news.

An apt time to reflect on corporate mergers no doubt (from an email blog by Vitaliy Katsenelson)

Corporate acquisitions often fail for one simple reason: the buyer paystoo much. An old Wall Street adage comes to mind: Price is what you pay, valueis what you get. It all starts with a control premium. When we purchase sharesof a stock, we pay a price that is within pennies of the last trade. When acompany is acquired, the purchase price is negotiated during long dinners atfine restaurants and comes with a control premium that is higher than thelatest stock quotation.

How much above? Acquisitions have the elements of a zero sum game. Both buyerand seller need to feel that they are getting a good deal. The seller has toconvince both directors and shareholders that they are selling at a high(unfairly good) price. The buyer, meanwhile, must convince those sameconstituents that they are getting a bargain. Remember, both are talking aboutthe same asset.

This is where a magic word — which must have been invented by Wall Streetresearch labs — comes into play: synergy. The only way this acquisitions dancecan work is if the buyer convinces his constituents that, by combining twocompanies, they’ll be able to create additional revenues otherwise notavailable to them, and/or they’ll be able to eliminate redundant costs. Thus,the sum of synergies will turn the purchase price into a bargain.

For example, General Electric has been a poor investment over the last twodecades largely because of poor capital allocation. The company lost a lot ofvalue in destroying acquisitions — they bought businesses at high prices,relied on false or unfulfilled synergies, and sold (divested) at reasonable (orlow) prices.

Another reason mergers and acquisitions fail: “dis-synergies” (a term you’llnever see in an acquisition press release). Two corporate cultures simply maybe incompatible. For instance, one company may have a strong founder-ledculture, where decisions are made by a benevolent dictator, while in the othercompany, decisions are made by consensus.

Acquisitions may also create a morale problem. The day before anacquisition is announced, people at the acquired company come to work as usual.They are not particularly worried about the future. The next day, though, theirjob security is suddenly at risk (remember, they are the potential “costsynergy”), and instead of hanging out on Facebook, they are now on LinkedInupdating their profiles and networking. They worry about the sustainability oftheir paychecks (and finding new jobs) a lot more than how they can help thisgreat, new organization that in fact may be about to let them go.

Finally, integrating businesses is difficult. Aside from culture problems,companies have to realign global supply chains, move or combine headquarters,and integrate software systems. In large companies, this task is like mergingtwo highly complex nervous systems.

Accordingly, while the acquisition press release may tout synergies, the pricetags and dis-synergies (risks) that come with the deal are left unsaid.

Clearly, acquisitions can create value. But when a company grows throughacquisitions, its management needs to have a specialized skillset that is oftendifferent from that used in running a company’s day-to-day operations.

It is important to examine the motivations of management when they makeacquisitions. When management feels that their business, on its own, isthreatened by future developments, their acquisitions will have a “Hail Mary”sort of desperation to them — and a corresponding price tag.