Unquestionably it will occasionally be sensible for companies to join forces. However, every company's circumstances will be unique and the reasons should make sense industrially, operationally and financially. Rules of thumb which do little more than relate acquisition prices to stock market comparables will certainly make things simple for the corporate financier; but it will be no more than coincidence if they have any direct relevance to a particular case. Some of the rigour involved in analyzing a buyout has a place in acquisition analysis. There, although bidding tactics are obviously involved, attention is at least focused on the variable which will affect future performance.
The attitude of corporate managers to all of this should be borne in mind. The threat of being acquired is, they are assured, the legitimate way to minimize inefficiency. And they may accept that companies have to go on changing hands., Expensively and occasionally, rancorously. But it would then be only natural for managers to interpret the rules of the game and play it in the way that offers them the greatest advantage. Only a small minority of industrial managers have any significant ownership stake in the companies for which they work. So while they may well accept that their mission is to maximize shareholder wealth, achievement of that objective may not affect them quite as directly as might be desirable.
As noted earlier, there is no clear agreement on the period to which maximization of shareholder wealth should be related. And if, halfway through the implantation of a longer-term plan to achieve that result, the company is taken over, the management may come to believe that their security has been needlessly put at risk. Broadly speaking the message seems to be that it is better to be big. Size is safety; and if there appears to be no incentive to be taken over it certainly seems as though growth by acquisition offers some protection. It would then only be human nature to perceive strategic benefits in an acquisition whose principal effect is to make the acquirer itself bid proof.
The continual trading in companies, accompanied each time by the claim that both vendor and acquirer have mad strategic gains, is not credible. For it to be true would imply that the Anglo-Saxons, had gained superiority in overall efficiency from an inexhaustible stream of synergies. But this seems not to be the case. Although the argument is sometimes used that it is the appropriate response to competitive threat, the evidence suggests rather that it has contributed to a decline in the competitive position of Anglo-Saxon companies across a whole series of industries. Motives should be examined more closely, and investors should be more critical, therefore, of earning s purchase as distinct from the creation of earnings from organic growth.
At the very least, the reasons for exceeding the buyout price (if a buyout is competing) should be understood and communicated by the acquirer. Buyouts will, after all, point to the value of the company before contamination by strategic considerations. At the same time those involved in buyouts must and increasingly do, realize more precisely the nature of the function they perform. For any relatively large leveraged buyout to produce the desired result the company must be re-sold within, say, three and five years of the buyout. Flotation is an option, but in the majority of cases sale to a corporate buyer is the actual outcome.
The attitude of corporate managers to all of this should be borne in mind. The threat of being acquired is, they are assured, the legitimate way to minimize inefficiency. And they may accept that companies have to go on changing hands., Expensively and occasionally, rancorously. But it would then be only natural for managers to interpret the rules of the game and play it in the way that offers them the greatest advantage. Only a small minority of industrial managers have any significant ownership stake in the companies for which they work. So while they may well accept that their mission is to maximize shareholder wealth, achievement of that objective may not affect them quite as directly as might be desirable.
As noted earlier, there is no clear agreement on the period to which maximization of shareholder wealth should be related. And if, halfway through the implantation of a longer-term plan to achieve that result, the company is taken over, the management may come to believe that their security has been needlessly put at risk. Broadly speaking the message seems to be that it is better to be big. Size is safety; and if there appears to be no incentive to be taken over it certainly seems as though growth by acquisition offers some protection. It would then only be human nature to perceive strategic benefits in an acquisition whose principal effect is to make the acquirer itself bid proof.
The continual trading in companies, accompanied each time by the claim that both vendor and acquirer have mad strategic gains, is not credible. For it to be true would imply that the Anglo-Saxons, had gained superiority in overall efficiency from an inexhaustible stream of synergies. But this seems not to be the case. Although the argument is sometimes used that it is the appropriate response to competitive threat, the evidence suggests rather that it has contributed to a decline in the competitive position of Anglo-Saxon companies across a whole series of industries. Motives should be examined more closely, and investors should be more critical, therefore, of earning s purchase as distinct from the creation of earnings from organic growth.
At the very least, the reasons for exceeding the buyout price (if a buyout is competing) should be understood and communicated by the acquirer. Buyouts will, after all, point to the value of the company before contamination by strategic considerations. At the same time those involved in buyouts must and increasingly do, realize more precisely the nature of the function they perform. For any relatively large leveraged buyout to produce the desired result the company must be re-sold within, say, three and five years of the buyout. Flotation is an option, but in the majority of cases sale to a corporate buyer is the actual outcome.
