Monday, October 21, 2013

The Acquisition Paradox

Acquisitions remain popular despite overwhelming evidence that they rarely create value for the acquirer’s shareholders. Yes, acquisitions fall in and out of fashion on a cyclical basis. Acquisition volume or waves seem tied to managerial risk aversion amplified by leverage. Relatively high acquirer share prices increase management confidence. The confidence, whether misplaced or not, is increased by cheap and plentiful financing, and the actions of acquiring peers.  This leads to the perverse results of buying high as acquirers chase returns, but frequently end up with bubbles. The deals are always justified by the “you do not understand” defense. Other defenses include “our deal is different” and ”everyone is doing it”. Such actions are usually supported by elaborate investment banking financial discounted cash flow models, fairness opinions and consultants reports.

Certain types of acquirers and managers are more easily influenced by such factors. These include:

1)     Industry Followers: industry laggards trying to keep pace with what larger peers are doing. An example is Lloyds bank purchase of HBOS to keep pace with an industry consolidation.
2)     Sweet Bird of Youth: firms suffering from declining core operations and growth are prone to climbing back up the growth curve through transformational strategic acquisitions. Hewlett Packard stands out as the poster boy of this acquirer type.
3)     Weak Governance: firms with powerful charismatic CEO/Board Chairman (AKA overconfident-hubris) can push thru their boards highly questionable deals. Fred Goodwin at RBS obtained board approval for arguably one of the worst acquisitions of all time-the disastrous ABNAMRO acquisition that ended up bankrupting RBS, Fortis and ABNAMRO).
4)     New Outside CEO: new outside the firm CEOs are especially subject to “acquisition fever”. They are keen to make their mark, achieve a quick win and enjoy their honeymoon period with their boards. M Meyer at Yahoo is a current example of this type of acquirer with acquisitions like Tumblr.
5)     Over Valued Firms: overvalued firms are likely to capitalize on their perceived overvaluation by funding questionable acquisitions using their stock. The classic case was the AOL acquisition of Time Warner.

That is my humble attempt at acquisition psychopath profiling. Other than hiring company psychologists and maintaining adequate supplies Prozac-we probably will continue to suffer from these acquisition psychoses.


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