mergers..?

Question

It's not a coincidence that mergers have occurred in eras of high prices. If, on balance, acquiring companies tend to do well, perhaps it's bec. they've overpaid, perhaps they had the courage to buy when everyone else had the courage to buy. It's no secret that mergers are quiescent when assets are cheap.Why?Because there's no courage to lend, or to borrow, no courage to imagine great things.

PLz help me with this text I have in my book. what's going on?I need to understand this story about mergers.

Answer 1

I'm not sure I agree with this statement. It is my opinion that acquisitions (I promise you, there is no such thing as a merger) are successful only when the management kill themselves to make it successful, and if they overpaid they are that much more motivated to show that the purchase was worth the price. And there are certainly many examples of overpriced acquisitions NOT working -- such as AOL acquiring Time Warner. Or when AOL acquired Netscape. I came from the tech industry so I am most familiar with those but there are lots that don't work, more than do work.

In my uneducated opinion mergers occur in eras of high prices because the acquiring company has more capital to play with BECAUSE of the high prices, and it is worth it to them to pay/overpay because the acquiring company wants/need to grow and its easier to buy than build.

This does not exactly answer your question...I am not an MBA but someone who has been on both sides on the fence on this issue. Hopefully someone smarter than me has the right answer for you. Good luck