Will’s Articles

Acquisitions

Play the Odds: Sell the Acquirer
(January 2005)

Merger & Acquisition (M&A) activity is back in vogue (“Merger Activity Ramps Back Up Along With Stocks and Economy”, Investor’s Business Daily, December 15, 2004). M & A is one of the greatest sources of wealth destruction both for Shareowners and the economy. To understand the impact of M&A activity on a company’s stock, I encourage you to read Chapters 16, 17, 19, 20 and 21 of my book Rich Shareowner, Poor Shareowner (Revised Edition). As cited, over 70 % of large acquisitions destroy value for the acquirer’s Shareowners- and truthful numbers would have predicted it. Additional evidence appears daily as with Hewlett-Packard’s poor decision to acquire Compaq Computer in 2002 (“Carly’s Challenge”, Business Week, December 13, 2004) In that hyped acquisition, HP’s stock underperformed its peers by over 70% in 2004. Investment bankers are now calling for a breakup of HP to “create Shareowner Value,” just as they chanted the same mantra when they advocated the HP-Compaq acquisition. JPMorgan Chase is another example of a touted merger destroying Shareowner Value relative to peers...

You decide what’s really going on. (Or see Money Ain’t Free: The True Cause of the Crisis in Corporate Responsibility.)
While industries with M&A activity tend to do relatively well in stock appreciation, Shareowners make the most money by owning the acquired company, and by not holding on to the acquirer. My rule of thumb is to sell the acquirer on news of the announcement if the acquired company is larger than 20% of the acquirer’s size. See Rich Shareowner, Poor Shareowner (Revised Edition)for the reasons.