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Strategies & Market Trends : Value Investing

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To: jeffbas who wrote (7148)	5/14/1999 3:42:00 PM
From: Bob Rudd	Read Replies (1) of 78476

"Synergy Trap" research showed 70% of the time acquisition premium wasn't recovered. The reasons include managerial hubris and desire to rule larger domain overuling shareholder interests, the difficulty seeing problems & issues [Cendant], and difficulty integrating culture and systems. I would agree with exceptions you noted and add that any merger that fills a critical strategic gap may indeed yield accretive synergy, provided the acquiror doesn't overpay. A related issue in competitive multi-bidder acquisitions is the "Winner's curse" [Richard Thaler wrote of book with that title] the tendency of high bidders in auction sales to pay an excessive premium. No excessively long preachy post on overpaying in mergers would be complete without this Buffett quote: <<Many managers were apparently over-exposed in impressionable childhood years to the story in which the imprisoned, handsome prince is released from the toad's body by a kiss from the beautiful princess. Consequently they are certain that the managerial kiss will do wonders for the profitability of the target company. Such optimism is essential. Absent that rosy view, why else should the shareholders of company A want to own an interest in B at a takeover cost that is two times the market price they'd pay if they made direct purchases on their own? In other words investors can always buy toads at the going price for toads. If investors instead bankroll princesses who wish to pay double for the right to kiss the toad, those kisses better pack some real dynamite. We've observed many kisses, but very few miracles. Nevertheless, many managerial princesses remain serenely confident about the future potency of their kisses, even after their corporate backyards are knee-deep in unresponsive toads.>> Warren Buffett, 1981 Berkshire Hathaway Annual Report

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