Your Money : Takeover Mania--Most Investors Aren’t Buying It
The corporate takeover wave keeps rolling, enriching those investors lucky enough to own the stocks of the targets. But for everyone else, this latest bout of merger mania is a non-event, or worse.
The non-event is in the stock market as a whole: Despite the busiest takeover activity since the late 1980s, Wall Street is getting no collective lift. The Standard & Poor’s 500-stock index, at 458.40 on Thursday, is no higher than it was in mid-March, before mergers began to mushroom.
The “worse” is in stocks of the companies doing the taking over: At least in the case of the highest-profile deals of recent months, the acquirers’ shares generally are lower today than before they made their bids. In some cases, the stock declines of the bidders have been dramatic.
What this market reaction suggests is that many investors don’t like the bidders’ choice of targets or the prices paid, or don’t see a fast enough or high enough payoff from the deals. Or all of the above.
To be fair to the executives fueling this merger wave, they are thinking long-term while many of their shareholders are thinking short-term. As an investor, if you fear that your earnings in Company X will be diluted for a year or so as it digests Company Y, you may jettison your Company X stock for the time being--even if you agree that the merger is a smart move for the long haul.
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Arbitrage also plays a role in depressing acquiring companies’ shares: If a deal is a stock swap, Wall Street arbs who buy and hold the target’s shares until the deal closes frequently “short” the acquiring firm’s stock as a hedge.
But some Wall Street pros say the overt lack of enthusiasm for bidders’ stocks isn’t a good sign. The rising fear is that too many of the corporate buyers are overconfident--and overpaying.
“I think there’s a little bit of the ‘greater-fool’ theory going on now,” says Scott Black, a principal at $650-million-asset Delphi Capital in Boston. In other words, ‘I may be a fool for paying $2 billion, but I’d be a greater fool to let this opportunity fall into a competitor’s hands.’
In particular, Black views this week’s $8.5-billion bid by American Home Products for American Cyanamid as extremely rich, at more than 20 times Cyanamid’s expected 1994 earnings. “I can’t see it for a slow-growth company,” he says.
Of course, virtually all of today’s merger deals are done in the name of “synergy”: Businesses are buying other businesses they believe are natural fits with their own. Cost savings will produce terrific returns for shareholders in the long run. Bigger is better. Etc., etc., etc.
The takeovers of the late 1980s also were justified by a catchy phrase. Then--the era of buy-’em-and-break-’em-up--buyouts were always done to “realize shareholder value.”
Unfortunately, in the midst of any mania, expectations begin to far exceed realities. “It’s probably fair to say that the vast majority of corporate acquisitions tend not to earn the kinds of returns that everybody expected them to,” says Source Capital’s George Michaelis, a veteran Los Angeles money manager who has witnessed many market cycles come and go.
David Tripple, manager of the Pioneer II stock fund in Boston, worries that the re-emergence of hostile bids (like American Home’s) smacks of desperation on the part of corporate execs in slow-growing industries. “People with too much cash and not enough growth prospects can make the most questionable acquisitions,” he says.
But if the question is whether investors can conclude that this takeover wave is a certain sign of a market top, Michaelis, Tripple and others say the answer is probably not yet. Outside of aggressive bidding for certain assets, Michaelis says, “Nothing (else) smacks of late-cycle excesses” in this market. The heavy use of debt, for example, is conspicuously absent so far, he notes.
Even so, it’s disturbing that investors by and large can’t seem to get excited about a takeover rush that Corporate America contends is all about synergy and big returns down the road.
To a significant degree, the corporate buyer has replaced the public in the market this year, as mutual fund investors in particular have pulled back. One buying mania has replaced another, yet the best the broad market can do is hold steady. That’s not what bull markets are about.
Synergy? What Synergy?
Investors haven’t been kind to stocks of the bidders in the latest takeover wave: Most have fallen since they announced their bids. A look at some of the biggest deals of recent months and how the bidders’ stocks have fared.
Bidder’s stock price: Bidder/Target Pre-bid Now American Home Products/ American Cyanamid 57 1/2 57 Conseco/Kemper 50 1/2 50 1/4 Eli Lilly/ PCS Health Systems 57 3/8 49 3/8 Foundation Health/ Intergroup Healthcare 35 34 1/2 Illinois Central/ Kansas City So. (rail unit) 33 1/4 30 1/2 Nextel Communications/ OneComm Corp. 29 7/8 25 5/8 Tyco Intl./Kendall Intl. 47 3/8 43 Wellfleet/SynOptics 25 1/4 19 5/8
Source: Times research
