Why you should steer clear of M&A – MoneyWeek

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Whybother?

Afirmcanusuallygrowmorecheaplyorganically,usingitsownprofitsandcashflows。

Sowhygototheexpenseandhassleofbuyingarival?

Afterall,astheFTsLexcolumnputsit,thelatestcropofdealshassomeofthetell-talesignsofdanger:highego,highpriceandover-confidence。

Yetthereareperceivedadvantages。

Itsafastwaytopropelafirmup,say,theFTSE100(which,likemanyindices,ranksfirmsonpuresize–marketcapitalisation)。

ForsomeCEOstheresthesatisfactionofknockingoutarival。

Italsousesupanysurpluscashafirmsshareholdersmaywanttospendanditgeneratesfeesforinvestmentbanks(whonaturallyfavourdeals)。

Aboveall,itsexciting–farmoresothanthedailygrindofrunningasteadybusiness–andcreatesasenseofbuzz。

Someoptimistsevenseeitasasignthatthestockmarkethasturnedacorner(seebelow)。

Itsapitythenthat,astheFTnotes,historysuggestsadisconcertinglylargeportionofMAactivityneverdeliversshareholdervalue。

Why?

Becausebuyingabusinessisaloteasierthanrunningandintegratingit。

Andmanyfirmsoverpayfortargetsbecausethesellerhastheupperhand–theyreallyknowwhatsunderthebonnet。

CanMAmakememoney?

ThereareseveralwaysforaretailinvestortoplayMA–however,temptingasthepresscanmakethemsound,wedavoidthemall。

1。

Buyatarget(andshortthepredator)。

Giventhattargetstendtogetashare-priceboostoncethemarkettwigstheymightgetbought,thetrickistobuysharesinpotentialtargets。

Betterstill,giventhatmostdealsfailtoaddvalue,whynotshortaprospectivepredatoratthesametime?

Youcouldeasilysetupadownbetviaaspread-bettingbroker(seeMoneyweek。

com/spread-betting)。

However,asRobertPrechternotesonMarketoracle。

co。

uk,pickingandchoosingtakeovertargetscanbeatrickygame。

Mostindividualinvestorssimplydonthavetheexpertisetomaketherightbets。

Andgetashortspreadbetwrongandlossescanrackupfast。

2。

BuyanMAboutique。

Alessriskyoptionistobuysharesinalistedadvisoryfirm,suchasEvercorePartners(NYSE:EVR)。

Thiswassetupin1996andspecialisesinadvisingonMAandothercorporatetransactionsthatincludepublicofferingsandrestructurings。

Theforwardprice/earningsratiotoDecember2010is25(droppingtonearer12in2011)withayieldof2。

3%。

Theshareshavelostaround35%inthelastthreemonths。

Soonetobuywhileitscheap?

Perhapsnot。

Withadoublediplooming,thisMAboomdoesntlooksustainable。