Some people wondered what companies were going to do with their huge cash balances. Now we know.

GE is using a mere fraction of its $100 billion+ overseas cash hoard to make its $13 billion offer for Alstom.

Pfizer is using its $50 billion overseas cash hoard to help in its  $100 billion bid for Astra Zeneca.

Is this a good thing?

Well M&A doesn’t usually help job creation. Quite the reverse. When American companies buy European companies, you usually get job cuts.

Does M&A help GDP growth? Well not as much as if the money had been invested in growing businesses organically.

Does it help stock prices? Absolutely Yes.  M&A is excellent for the stock market because the analysts expect ‘synergies’ = cost-cuts = job losses and because all possible bid targets get an unearned share price boost in anticipation of offers.

And that gives a general boost of confidence.

But does it do any actual good?

The PriceWaterhouseCoopers book ‘Five Frogs on a Log’ spells out the perils of M&A.

‘You are the acquirer you have 2,000 employees. Assume that they will spend only 30 minutes a day wondering, speculating and trading gossip with other employees about how the deal will affect them.’

‘That comes to 1000 hours of lost productivity per day, 5000 hours a week, 20,000 hours a month.’

‘Add to that the 1000 employees in the acquired company who are probably feeling less secure and are spending, conservatively, one hour per day wondering, speculating and trading gossip about the future.’

‘That comes to an additional 20,000 hours per month in lost productivity. A combined total of 40,000 hours.’

‘At an average compensation rate of $40 per hour, it’s costing you $1.6 million a  month (perhaps $2.4 million  fully loaded) in lost productivity, not counting the impact of deteriorating customer relations and delayed sales due to unanswered phone calls, missed schedules and turnover of talented people.’

PWC’s conclusion was that over 50% of M&A destroys shareholder value.

Leave a Reply

Your email address will not be published. Required fields are marked *