Wednesday, April 25, 2007
Merger Mania
It eats corporations whole! It’s the new trend. The new pet rock, the new chia pet or the new coach purse for all the female readers. What is it?
It’s the merger.
The last two years have been, on the Chinese Calendar, the year of the merger. Its not over yet, and it really is benefiting you as an investor and as a consumer. First though we’ll cover the best part of mergers from an investment standpoint, its more important to us.
Mergers, as defined by Webster’s Dictionary are: a statutory combination of two or more corporations by the transfer of the properties to one surviving corporation. The combination creates one remaining corporation with the assets of all the previous corporations included.
How does this help your portfolio?
First, mergers generate a lot of money on the street. When one company buys out another, often a high premium is paid for the assets of the corporation. Typically the purchaser gives you 10-20% added to the current value of the stock but sometimes the cuts can go up to 50%. In one day you could make what most portfolios make in years.
After the companies fuse together, the new company can cut jobs in the production of its product. A cut in expenses drives down the PE multiple you initially paid for the company, even with its inflated price. The new corporation can create products more cheaply, expanding its market presence.
Typically in a merger you will receive stock of the newly combined company, but sometimes you may receive cash for your investment. Post-merger I would suggest selling your shares that you have received regardless of the percentage gain you have collected. Generally the stock drops off after the news of the merger settles and business goes on as usual. Granted you now own shares of a better positioned company, but your returns will most likely lag the overall market, and as we’ve learned earlier, lagging the market is the best way to work until your 85 and wrinkly.
The consumer ultimately benefits the most from decreased costs of the product due to lower production expenses. After a merger, a layoff usually occurs of a significant amount of laborers which is terrible for the employed. Those costs are usually sent to the consumer to gain a greater market share so all is not lost.
Mergers are good, not bad news. They boost your returns, lower prices of goods and make shopping decisions easier. Mergers aren’t corporation monsters.