December 18, 2006
M&A Waves and Stock Prices
Researchers have found a correlation between periods of high M&A activity in stock deals and subsequent stock market declines. Rationale for the correlation are disputed. The M&A activity seems to flourish when stock is overvalued. But why are sellers content to be paid in overvalued stock??? Shleifer & Vishny believed that managers of the seller unload the new stock for cash; Rhodes-Kropf & Viswanathan contend that sellers can not tell whether the deal price represents real value increases (synergies) or the overpricing of the acquirer's shares. My view is that there is a relative difference in the overpricing; the target's shares are often more overpriced that the acquirer's (50% inflated stock is buying stock inflated at 100%) and that seller company executives diversify and partially cash out. The current merger wave is based largely on cash deals, financed with low interest rate money. There is also a dispute over whether the current wave reflected overvalue debt and will have a similar effect.
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