Three Active Acquirers
17 Pages Posted: 21 Oct 2008
A money manager is assessing the long-term historical performance of three active acquirers: Symantec, Republic, and U.S. Office Products. The task for the student is to determine why rapid growth by acquisition might not always be good for investors.
Three Active Acquirers
In April 1999, Nelson Poole, a portfolio manager with a large U.S. money-management firm, noted the recent dramatic rise in merger activity in the economy. He wondered whether and how his portfolio management should be modified to respond to merger-and-acquisition (M&A) activity among corporations. He selected three very active acquirers to analyze: Symantec Corporation, Republic Industries, and U.S. Office Products. Poole had taken sizable positions in each of those firms during the late 1990s, and wanted to determine the impact of their acquisition plans on his investment returns. Poole's investment style had been a blend of “value investing” (buying undervalued securities) and “growth investing” (buying securities of firms with excellent growth prospects). He had invested in each of the three firms because of their growth potential. None of the three had met his investment expectations; he wondered why they had fallen short. He hoped that a consideration of these three cases would offer practical approaches for assessing a firm's plans to grow by acquisition. He mused that the three firms might reopen a debate among his staff about what kind of growth firms were (or should be) maximizing, and how to measure that growth.
As a basis for the upcoming staff meeting, Poole asked his securities analysts to pull together a description of the acquisition histories of the firms, with a summary of their earnings and earnings per share (EPS), economic value added (EVA™), and market value added (MVA). The Appendix describes EVA and MVA.
The year 1999 was shaping up to be another record-setting year for M&As. The previous year had shattered several records for dollar volume and number of transactions. In particular, it had featured several “paradigm-shifting” deals that were bound to reshape the industry and the economic landscape: Exxon and Mobil ($ 86 billion), Travelers Group and Citicorp ($ 73 billion), SBC Communications and Ameritech ($ 72 billion), AT&T and Tele-Communications ($ 70 billion), NationsBank and BankAmerica ($ 62 billion), British Petroleum and Amoco ($ 55 billion), and Daimler-Benz and Chrysler ($ 40 billion). The total value of all transactions in 1998 exceeded $ 2.4 trillion. Based on first-quarter results, it seemed that 1999 would continue that trend.
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Keywords: mergers and acquisitions, investing, portfolio management, pooling of interests
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