Do I buy a company's stock after they acquire another company?

Do I buy a company's stock after they acquire another company?

Good question and it’s one that still trips up investors till this day. It seems like the default answer, it's a good idea to make the purchase cause now the bigger company will benefit from volume rebates, synergies, a better logistical infrastructure and greater combined revenue and foot traffic. Unfortunately, the market is not as optimistic as retail investors are. See what people forget is that there is always a lag in the benefits of acquisition and what they actually become apparent in the stock price of a company.

 

And don’t forget one of the golden rules of investing and that is that all the current information currently known about a stock has already been factored into the price. If this is the case, all of the benefits of acquisition have already been priced into the stock and they cannot be catalysts that push the stock price higher.

Problems that arise with acquisitions

  1. Financing: The first thing that you must consider it that the company has to pay a huge sum of money to acquire another company. Take the current AT&T Time Warner deal where AT&T is issuing records amount of debt just to assume position of Time Warner. On top of this, AT&T already has outstanding debt that this will add to. Factor in the costs of borrowing - it can be awhile before companies are able to shed this financial burden which can drive up borrowing costs as interest rates rise. Just as a rough figure AT&T plans to raise 40billion by issuing debt.

  2. Assimilation & Synergy: The second thing you have to consider is how long will it take for the company to fully integrate the companies into one mega company. Obviously there are some things like volume discounts that are immediate both the long term fusion is an important factor to analyze. Take Sobey’s purchase of Safeway which led to a 2 billion write off. The best kind of acquisition is where one company is able to add another company as a business segment and infuse it into their current operations. If they have to go out of their way to revamp many components it may be awhile before the stock price responds.

  3. Not Messing Up What Works: This one goes without saying but larger companies always feel that they know best. Take Target’s entry into Canada and the flop that happened with that. It's important to ensure that the company has the required personnel to smooth the transition and aid in developing synergies.

 

Synergies are the backbone behind many acquisitions - they represent the combined effect that companies can produce through interaction with each other to a level that is greater than the sum of their separate effects.  

 

      4. Long Term Prospects & Overall Market Sentiment, Regulations ETC

    Finally, it’s always important to consider the overall market sentiment and the long term prospects of an acquisition. Is the company looking to acquire with the future in mind, to gain additional market share, as a desperate move or shareholder pressure. It's important to address this last point as well as looking at the future revenue streams that a company. If we look at the Amazon and Whole Foods Acquisition - Amazon bought it for a few reasons

  1. They have a tangible (established) base for their food business

  2. Buying an existing brand allows them to see what Whole Foods has used in the past and allows them to use the expertise of management

  3. Buying a non-conventional brand (like Whole Foods as opposed to a traditional grocer) allows them to penetrate into a niche market where there is greater room for diversification and expansion

  4. It gives them a physical storefront

 

These are just some of the reasons why the acquisition happened (at least in my opinion) - what illustrating it allows you to do is further re-enforce your investment thesis and allow you to do more research on those points and solidify your decision.

 

Disclaimer: All of the above information is my own personal opinion. The examples used above are for learning purposes only and should not be used as investment advice. Please do your research and consult with a licensed representative before making any financial decision.

Thumbnail Image: CXC Global

 

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