There has been a lot of intense activity with companies deciding to merge in the start of 2011. It is up 78% since the beginning of last year. A large $7 billion deal made by Ensco and Pride International was revealed. Every sector seems to be taking part in this exciting process, from coal companies to banks.
This activity has been thriving due to the combination of extremely low interest rates and a rising stock market, which make it easier for firms to do more deals. “Companies have the option of borrowing money at attractive rates to finance deals or using their stock/cash as acquisition currency."
I think this is great to hear our economy getting back on its feet. It is also seen that when companies are merging stocks seem to do very well, which is a plus. However, there can be a downside to mergers because it is not easy bringing together two different corporate cultures, so it doesn’t always work out. Is it a good thing that merging is going on right now with our economy starting up again?
4 comments:
Its interesting to see how much of an impact news from china has on markets, but this time nothing seemed to happen. I think this is actually showing how dominate china is becoming because news from them is never surprising. Most people already had the expectations of raising rates and even if rates remained unchanged, the rest of the world has a lot of confidence in china.
There is another problem besides bringing two differing corporate cultures together. Mergers and acquisitions can lead to companies bringing on significant earnings onto their balance sheet. As mentioned in the article, stock prices go up when earnings are high or are expected to grow. In accounting we talk about mergers an acquisitions and the fact that there must be a solid foundation for both companies in order for stock prices to stay steady. If one company simply buys another in order to essentially "buy earnings", there is no economic gain there. People will continue to speculate and inflate stock prices until it finally falls when there's no REAL earnings backing it. For these reasons, I am weary of some mergers and acquisitions; however, some are obviously legitimate and aid in economic growth.
Some are also when a company is doing poorly so another company buys them out before they bankrupt. This is indication of an ailing market.
A concern about mergers that hasn't been mentioned yet is the loss of jobs. Two companies merging into one will often result in the loss of employees marginal product of labor which naturally leads the loss of jobs. If a merger happens within an industry that is growing job losses are less likely to happen.
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