Takeovers and the Merger Madness

While you can always have funeral plans to reduce your family’s financial burden when your time has come, there is no doubt that death will always be painful. The same thing is just as valid in business. However, investors in the ’80s knew very well how to take advantage of debt financing to purchase troubled ventures and turn them around.

Interestingly, the tough acquisition market provided significant bargaining advantages to subsequent bidders, sellers, and all others on the other end of the spectrum. While it was good to see gains from such sales, securing profit in negotiations with the seller was another thing. Apparently, this lopsided split between the two parties was largely determined by the law or the market of the time.

Usually, there are three basic explanations to this business phenomenon. One, since the market for takeovers matured very quickly, the buyers also competed for the targets. This competition was what drove the prices up until it reached the point when marginal gains were reduced to very small values. Two, buyers who were quite successful suffered what is called the winner’s curse. In auctions, although some were willing to pay above the prices, the market was determined by the average of all offers. Three, ’80s managers habitually made bad decisions when acquiring companies, either by choosing their personal interests above the shareholders’ interests or overvaluing the targets.

Now, you might think that if those market-based phenomena make sense of the disparity between target stockholders and the bidders’ gains, one would reasonably expect that corrections have been made. It should be noted though that managers and firms definitely learned from their mistakes. Testaments to this claim are the economic incentives that have lead many ventures to correct their practices.

In the end, manager of bidders are expected to become even more cautious, especially under pressure from their shareholders. It is hoped that restrictions by state governments, rules on preferential treatment, and fair disclosure regulations will aid the course of takeovers.

With a growing body of law focused on restricting the bidder’s power, the future seems brighter for mergers.