With the positively yawn-inducing news over the weekend that Yahoo had rejected
yet another offer from Microsoft, Joel West is reminding people that big acquisitions almost never make sense
and very often destroy value. As an example, he points to the news that AMD is writing down $880 million on its acquisition of ATI only 8 months after it already wrote down
$1.6 billion. That's $2.5 billion wiped out in a very short period of time. As West notes, small acquisitions can make sense for small companies, at least in allowing their founders to cash out -- but for big companies it's usually more about ego: helping them move up the Fortune 500. But those deals almost never work out:
The fundamental problem of acquiring public companies is that you have to pay more than the market price -- so the claim is either you know better than the market (never true) or that you will realize synergies that increase the value of the acquired company (almost never true). So the choice is between buying overpriced good companies, or troubled companies not worth buying at any price. Acquiring a troubled company means you acquire their troubles -- whether it's exposure to an industry past its peak (AOL Time Warner, Viacom-Blockbuster) or a company with a justifiably lousy market position (Daimler Chrysler).
The other aspect that he doesn't touch on is that with big companies, there are always investment bankers crawling all over management trying to convince them to buy up other companies
one week, and sell off pieces
the next. This "buy 'em up, sell 'em off" strategy almost never works for anyone but the investment bankers who take their fees both coming and going. So as the silly battle continues around Microsoft and Yahoo, rest assure that pretty much whatever happens, you can expect to see a destruction in value rather than any "synergies" revealed.