Monday, June 16, 2014

When companies merges, or being acquired

When two companies merge, it usually fits my funny formula: One Loser + One Loser = 2 Losers as illustrated by the recent deal with Radio Shack. When one acquires another, it is a different story and usually is profitable for both but not without exceptions such as AOL and Warner Times.

After the merger, they can streamline the operations such as one sales force instead of two (obvious for selling two drugs instead of one) , one accounting system instead of two...The employees usually suffer or are laid off.

The crown jewel is moving the headquarter to the acquiree's country if it is has lower tax rate. It would be good for the investors / executives but bad for the high-tax countries. It also teaches them my theory: When you take all the golden eggs from the geese, they will fly away.

In my book Finding Stocks, I described how to screen these companies and I usually pick one or a few during Early Recovery (a phase defined by me in the Market Cycle). One in 2003 was more than double and a few in 2009 had far higher returns than the market.

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