Acquisitions are not for the Faint of Heart

Corporate acquisitions and mergers happen all the time. They standout because they generate excitement, they are high risk, they involve a lot of skills, they are clandestine, they are ego feeding and they make people richer. Acquisitions are made for a variety of reasons including access to technology, asset gathering, competitive positioning, perceived value enhancement, acting as a white knight and so on. Afterward the parties involved issue press releases extolling the virtue of the deal and the analysts have a field day dissecting the pros and cons of the deal..

Acquisitions occur in bunches. The 1960’s saw the rise and fall of the conglomerate. Business schools lent a hand by advocating the concept of the professional manager who could manage anything. Investment bankers played their part by convincing investors that higher earnings multiples should be applied to companies that were growing by conglomeration compared to those growing organically.

Since that flourish, other reasons for mergers and acquisitions have emerged. For instance diversification and vertical integration have acted as the driver for many deals. At one stage, commodity producers loved to drive into other’s territory. For instance, fossil-fuel based enterprises bought metal producers and visa versa. At other times chemical companies bought oil producers on the basis of ensuring raw material supply.

Financial design has also played a role.We are not far removed from a period defined by private equity- inspired deals. This was motivated by low- cost capital and the ability of the the acquired companies to increase their debt capacity

Many acquisitions and mergers do make sense and are well executed. One notable example is United Technologies. For well over one hundred years a series of judicious transactions has resulted in a remarkable company. Their management teams know how to grow value by applying acquisition skills not commonly duplicated by others. In September, 2011 UTX were at it again with the acquisition of Goodrich. Owners of UTX shares can rest assured that this is another link in a long and successfull chain of very accretive deals by United Technologies.