What Are Mergers Good For?
http://www.law.harvard.edu/programs/olin...ce/MediaMentions/NYTimes_June.6.2005.pdf
Author: Morgenson, Gretchen
Source: The New York Times
Year: 2005
Abstract:
To most investors, mergers are the stock market's equivalent of catnip. Takeover bids typically provide a nice boost to investors' portfolios and confirm their stock-picking smarts. And to hear the executives orchestrating them tell it, they always produce greater profits at the combined company down the road. Business publications and newspapers, including The Times, celebrate the deals with breathless tales of how they came together, complete with photographs of smiling executives shaking hands in front of a crowd.
This year, with the stock market moving sideways, buyouts and the gains they generate are prized all the more. There have been a lot of them, too. This year, according to Thomson Financial, the first quarter's combinations were valued at $308.2 billion, up 17 percent from the value of deals announced in the same period in 2004. If this activity continues, 2005 will be the fourth-largest year in deal size.
And yet, for all the profit and promise that mergers seem to hold, the truth about companies combining their operations is a darker one. Academic research suggests that few mergers add up to significantly more prosperous or successful companies and also that acquisitions during buyout booms, like the one we are in now, are more likely to fail than those made in other periods. And when one company acquires another using its own stock as currency, as commonly happens today, shareholders' stakes in the acquiring firm typically decline.