Mergers & Acquisitions - do they work? Ever?

You can grow organically, or you can buy another firm. You look for synergy, and economies of scale. In umpteen years of advising clients on buying out others, I’ve never seen them. You might think you can cut costs in the merged firm, but don’t underestimate the costs of integrating two different ways of working. You may be getting access to a bigger customer base, or new markets. You may be a megalomaniac.

The Economist says that three quarters of mergers fail to increase shareholder value, and half destroy it. Look at the RBS ABN Amro debacle, which we are paying for. Don’t think it’s just big companies that muck up like this – anything they can do, so can small companies!

A lot of mergers or acquisitions are the result of management boredom, ego, and are encouraged by the advisers. The only ones guaranteed to profit from this exercise. Personally I spend my clients’ money like it’s my own. See the moths!

Some find out well into the buying process that it’s not what they thought but they feel that they are committed, so go through with it anyway, hoping it will work out. It won’t – they know that deep down, so smile sweetly, pay the bills, and walk away. It’s cheaper.

A lot of my clients have preserved wealth and gone on to grow through knowing what deals to leave on the table. Just about every deal I’ve seen has been underestimated in terms of cost and effort, and overestimated in terms of benefits. So if it’s looking marginal, it isn’t. Walk away. Another deal will come along – you won’t miss out.

Kraft and Cadbury will be interesting – looks like Kraft paid too much and Cadbury got too little. So many cultural differences will take an awful lot of effort to overcome. But with deals like this the ordinary man can make money too. Here’s maybe how.

Generally, owners of predators worry about overpaying, which sends their share price down. Whilst investors get excited about the target and that sends the target’s share price up.

So if you expect a bid (and Kraft’s was telegraphed a long way off), you buy the target and sell the predator. You can do this with a long spread bid on the target and a short spread bid on the predator. If the deal is announced and predator price falls and the target’s rises, you should make money on both positions. You need to commit the same amount to of money to each part so your strategy is market neutral, so if you’re right about the deal you should make money if the market rises or falls.

Of course if you thought the Cadbury deal would benefit Kraft shareholders, you would have simply bought Kraft shares. But you didn’t, did you?

PS This is not investment advice! Speak to your professional advisers if you are contemplating doing any of this. Each deal is different.