Twitter icon Email alerts icon Latest News RSS icon Magazine icon Stay connected:

View the article online at http://citywire.co.uk/wealth-manager/article/a732333

Hubris or good business? The psychology of M&A

by James Phillipps on Feb 05, 2014 at 10:18

Hubris or good business? The psychology of M&A

Hubris or good business? Understanding the psychology behind mergers and acquisitions

An oft quoted support for the future performance of equity markets is that corporates around the world are cash-rich, and that merger and acquisition (M&A) activity will pick up as the economic cycle continues to recover.

If we look at the historic pattern, M&A activity moves with the stock market cycle, yet current activity levels are lagging the markets. Clearly, levels of cash on balance sheets are at very high levels and, within the UK, leverage ratios are at multi-year lows, which will make financing any M&A activity easier. All these point to a potential resurgence in M&A activity.

There have been some signs company managers are starting to view the future more optimistically, with flickers of life on the takeover front.

In the UK we have seen Schneider’s bid for Invensys, Polymer’s bid for Fiberweb, and Amec’s ultimately unsuccessful bid for Kentz, and its more recent bid for Foster Wheeler.

M&A psychology

Comparing M&A activity relative to the broader market from a behavioural perspective, one obvious feature is that companies typically make more acquisitions in a rising market than they do at the bottom – the opposite of the  ‘buy low, sell high’ route to value creation.

So while M&A activity may be good news for the market overall, and will clearly have a positive impact on the share prices of the companies that are acquired, is it good news for shareholders of the company making the acquisition if they pay the wrong price?

Given the extensively documented behavioural biases that affect investors, it would hardly be rational to assume company management teams will be immune to the same biases when investing shareholders’ capital.

In fact, the same traits tend to be very much in evidence. Typically, in the three years post acquisition, the share price of the acquiring company has underperformed similar peers by the order of 5-15%.

While that underperformance may not sound too scary, there are some spectacular failures; Hewlett-Packard is once more in the press after acquiring UK company Autonomy for $11 billion (£6.7 billion) in 2010 and subsequently having to write-off $8.8 billion.

Sign in / register to view full article on one page

leave a comment

Please sign in here or register here to comment. It is free to register and only takes a minute or two.

News sponsored by:

Long time coming: is the recovery here to stay?


Ian McVeigh and Steve Davies, managers of Jupiter's UK Growth fund, talk about their predictions for the UK equity space. Click here to watch a series of sponsored interviews with Jupiter's fund managers on the UK equity market.

Today's top headlines

More about this:

Look up the funds

  • JPM UK Managed Equity A Acc
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them

Look up the fund managers

  • James Illsley
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them

Archive

On the road

Click here to find out more from the Audience Development team.

Sorry, this link is not
quite ready yet