Investors routinely cheer and bid stocks up on merger and acquisition announcements. What's generally lost in the short-term noise is how often the long-term truth is that companies overpay for the entities they acquire.
Data show that companies frequently overpay for mergers and acquisitions rather than driving a hard bargain for better deals, and the goodwill impairment charges that can occur years later don't truly reflect the loss of paying too dear a price.
There are plenty of good examples to draw from. eBay
Harvard Business Review said last year that studies repeatedly show that the failure rate of mergers and acquisitions lies somewhere between 70% and 90%.
The reason for this could vary from managements that are desperate to find a way to spur future growth (and impress investors with the short-term possibilities rather than worrying about the long-term reality) to even the hubris of throwing around the big bucks in bidding wars, all the while lacking a real concrete strategy for what happens after the "win."
Greenberg brought up the idea that one day soon, accounting may be changed to more adequately reflect the losses companies incur through misguided, overly pricey acquisitions. Investors, curb the short-term enthusiasm for M&A activity. The truth about some of these pricey deals will come out over the long haul, and the statistics don't look good.
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Alyce Lomax does not own shares of any of the companies mentioned. The Motley Fool owns shares of Microsoft. Motley Fool newsletter services have recommended buying shares of Procter & Gamble, eBay, and Microsoft, as well as creating a bull call spread position in Microsoft. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.