Why do companies acquire other companies?
Imagine this: you’re CEO of a fairly successful company. Your cash-flow margin is solid, and your sales are growing. You’re hiring new people, integrating them into your culture, increasing your dividend, and gradually expanding. Life is good. You only have one problem: your cash-hoard keeps growing.
Normally, that’s not a problem, or at least, it’s better than the alternative. But eventually that cash calls to you, telling you that it wants a new home. What do you do?
If you’re like many CEO’s, a major acquisition might be in store. Buying someone else out can instantly expand your top line, promise you operating synergies, and—since you’re now CEO of a bigger company—expand your personal compensation as well. What’s not to like?
Consider: bought out firms usually lose their top engineers and sales people, because the new parent almost always favors its own people. Cultures are hard to merge; people do things for a reason, and they resist change. Big deals attract big competition, and often big scrutiny from government and industry watchdogs.
These are all reasons why the synergies from large acquisitions never seem to live up to the hype. But small acquisitions—they’re another story.
Douglas R. Tengdin, CFA
Chief Investment Officer
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