In the Wall Street Journal article, “M&A Mystery: Why are Takeover Prices Plummeting?”, Monga outlines the recent decline in frequency of acquisitions occurring as well as the decrease in premiums. Monga states, “U.S. companies are paying just 19% more, on average, than their acquisition target’s trading price one week before the deal was announced”. This is the lowest average takeover premium since 1995 according to Dealogic. Also, in 2013 only 15 takeovers involved rival bids, whereas in 2012 there were 27. U.S. acquirers have announced only 9,347 deals so far this year, which is about 16% lower than at the same point last year. Why is this occurring?
CEO of Donnelley and Sons stated that buyers are finding it increasingly easier to persuade sellers to accept lower premiums because the valuations of their companies are already quite high. On the other hand, Robert Kindler, who is the global head of mergers and acquisitions at Morgan Stanley, cites uncertain times as being the crux of the matter. This uncertainty stems from “political uncertainty, industry cycles, a tepid economic recovery and expectations that the Federal Reserve may soon reverse policies that have kept interest rates near historic lows”. This uncertainty is resulting in hesitancy in the market, which dissuades firms from initiating big deals.
However, to add to the confusion surrounding the decrease in acquisition premiums and frequency, the market seems to be rewarding takeovers. Stock prices of acquirers have increased an average 2.4% between the day before and the day after a deal’s announcement. If the market is rewarding take overs, then even in the face of uncertainty, why are companies opting out of acquisitions, and why do the acquisitions that are occurring have unusually low premiums? Is there an underlying industrial organization story to tell here?
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In our economic evaluation of mergers, mergers should not occur. WHY DO THEY!? More importantly why do investors think merging adds on average 2.4% to a company’s value? Both investors and companies seem to not be maximizing profit and playing under a different set of assumptions than those discussed in class. On idea I had for why mergers might be slowing down now is that many inefficient companies lost huge sums of money in 2008. The sudden flood of buy ups might still be keeping prices low and giving buyers of companies an advantage to find the best deal.
So is economic uncertainty making merger less frequent because firms are unsure of the future? Or is it making them more likely, because potential sellers are offering lower prices for buyouts? Either way, it is interesting the way uncertainty impacts markets, and effects the way firms act.
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