Well it is possible that there will be synergy, and it is possible that there will be long term benefit from the merger, but in the short run (i.e. 1-2 years) it is almost certain to depress earnings. The problem with stock acquisitions in general is that they usually benefit management at the expense of shareholders. They benefit management from a salary standpoint - since the company is larger they can command a larger salary - and from an ego standpoint. As I indicated, the recent WSJ article raised some serious questions about whether stockholders benefit from such acquisitions.
An interesting example of a company where I believe stockholders did benefit from such acquisitions was CSCO. In that case there was the special factor that CSCO was valued at about 100xearnings while the companies they were buying were valued much lower. Thus whenever they bought a company with stock and paid say 30 times earnings, the stock of CSCO went up, so long as the PE ratio of CSCO stayed at 100. Of course, now it is down to 30 or so, so growth by acquisition no longer works.
In this case, if VECO were priced at say 40 times earnings (40x1.40 or $56/share), then a stock acquisition might make sense. If the share price were $56, then the number of shares issued to purchase WYCO would be only 1.5m, or 25% of VECO, and I wouldn't quarrel with that valuation. The problem comes when the PE that you pay for the acquisition is higher than the PE of the acquirer. Then what happens is the reverse of the situation you have with CSCO. The earnings of WYCO which you just paid say 40*earnings for get valued down to the PE ratio of VECO 12-20, and the overall value of the combined firms declines substantially. Granted, if there are synergies you could end up with sufficient additional earnings to make up the difference, but evidence indicates that sufficient synergies don't usually occur.
The final point, which comes from the WSJ article, is that in making an acquisition a company always has the option of paying cash, or paying stock. If they pay stock, they imply that the stock price is fully valued, and they are happy to issue more. If they pay cash, the implication is that they expect the stock price to rise in the future, and are unwilling to issue more at the current price, and thus are willing to go into debt instead. Of course they can always do a secondary offerring in the future to pay off the debt, if necessary. So in essence, the company has decided to issue stock now instead of later, indicating that they believe that the stock price will not be higher post-merger than it is now.
Carl |
