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VIEWPOINT: Corporate transactions: lose-lose deals

October 29, 2007

Corporate transactions, such as the sales of Peoples Bank and First Indiana Bank, as well as mergers of utility companies, benefit no one.

For example:

Retail customers: No evidence exists that consumers benefit from these transactions. Companies might argue that fees and prices rise more slowly in larger organizations, a result of efficiencies, but no proof is available, and the principle of diminishing returns suggests that, at some point, the cost of running a large entity becomes proportionately greater than the cost of running a small one. In any case, individual customers perceive no improvement.

Employees: Disruption in the personal lives of employees is common when new leaders take charge after a transaction. From the date of announcement until closing and the arrival of new executives, employees experience anxiety about their uncertain futures. Many managers are dismissed, transferred or forcefully retired. While wholesale replacement of company leaders appears counterproductive because of the immediate disappearance of valuable experience, most acquiring companies replace everyone at the top.

(In a recent utility transaction, an executive declared that employees would have greater opportunities for advancement with the new owner, absurdly suggesting that Indiana residents would want to move to the larger company's other locations, such as China and Guatemala.)

Insiders: At the time of sale or acquisition, board members, executives and family members who own large amounts of shares relish receiving either cash or shares having a value higher than the current market value of their holdings.

Such euphoria is misplaced for two reasons. First, the value of their original stock, on its own, is likely to grow over time. Without doubt, the buyer believes the acquired business will grow; otherwise, the transaction makes no sense. Second, the leadership group can delegate leadership to others, thereby achieving the goal of laying off day-to-day responsibilities while continuing to hold their shares.

(The distasteful provisions giving bonuses to executives of an acquired company insert a bias into this hypothesis. These provisions are proposed by those who benefit from them and are routinely approved by shareholders without serious debate.)

Shareholders: Like insiders, shareholders initially feel elation on expectation of receiving cash or new shares having an instantly higher value. However, frustration arises when shareholders realize that their dividend stream has diminished, that capital gains taxes are due, and that they either hold shares of the acquiring company or pay commissions and fees to acquire a new investment.

This circumstance causes anxiety, especially in older and retired investors. Those who keep shares of the acquiring company without analyzing its business and financial condition take unanticipated risks.

Institutional and corporate customers: Benefit might accrue to this economic category. For example, a larger financial institution, the result of mergers and acquisitions, might be able to handle larger loan requests from chief financial officers, to service larger and more complex retirement plans, and to make more significant commitments to local governments. This benefit has not been documented, and is difficult to prove. Despite this potential benefit, Indiana residents and businesspeople feel frustration that economic power is transferred out of state.

I invite challenges to these beliefs, and I would like more information about how institutional and corporate customers have benefited from bank and utility mergers. Send e-mail responses to john@wpam.com, subject line Indiana Takeovers.



Guy is a money manager, certified financial planner and president of Wealth Planning & Management LLC.
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