Making money from mergers & acquisitions

Mergers and Acquisitions (M&A) has long been known as a gold mine thanks to significant fluctuations in stock prices following a sudden affair.
M&A and stock price fluctuations

Normally, share prices of a company which is to be taken over by another sees a sharp rise because the buyer usually has to pay a heavy price so as to encourage the existing shareholders at the target firm to sell out shares. What is more, widespread speculation could drive up expected share prices far beyond acquirer’s anticipation.

On the contrary, stock prices of the acquiring firms often slide for several reasons. First of all, substantial expenses for the takeover could cause temporary financial imbalance which could thus adversely hit business performance. Secondly, such deals always carry potential risks such as conflicts between the two management boards, temporary productivity reduction due to difference in business culture. Finally, acquisitions would take around two and three years to bring about evident efficiency as it takes time for transformation so as to be in accordance with the post-acquisition period.

It is noteworthy that these are short-term fluctuations that could not applicable to all acquisitions. Yet, enormous difference in stock prices would be commonly found in inefficient market where experienced investors would gather stocks of target firms and simultaneously sell those of acquiring firms.

Look back at Masan Consumer-VCF deal

Much attention has been given to the Masan Consumer-VCF deal due to the widespread popularity of these two brand names as well as the very first sudden acquisition of a listed company.

VCF’s stock prices experienced a considerable increase on the rumour. The consequent price fluctuations on the official announcement of the deal have reflected the other side of the Vietnam’s stock market: it is rumour rather than official information that operate the market.

Risks of famous M&A

Despite a fresh appearance, a great number of firms involved in M&A deals have been found on the Vietnam’s stock market. First of all, Danang Plastic Company (DPC) was about to merge with Binh Minh Plastic Company (BMP) in late 2006. The rumour transmission provoked investors to push up DNP price to nearly 4 points on hopes of BMP/DNP exchange ratio of 1/1 while the book value of DNP was merely 0.8 points.

It is the weak information security that makes the deal to fall through.

Also, Vien Dong Pharmaceutical Company (DVD)’s intention to take hold of the competitor Ha Tay Pharmaceutical Company (DHT) in 2009 drove stock prices of the latter to 100,000 dong per share. Yet, the unsuccessful affair has brought about DHT prices dropping 30pct. As such, investors who hunted stocks of the target firms would suffer the most for betting on an unsuccessful M&A deal.

Vietnam’s stock market has seen a variety of “noisy” M&A affairs such as shares of Kinh Do Company, KMR and KMF. Despite investors’ high expectation, hardly has any “stock waves” come both pre-acquisition and post-acquisition due to equal exchange ratio at most of the cases.

In addition, profits always come with risks in stock investment whereas M&A deals would be more of restructuring rather than a takeover, which could hardly pose significant risks. As a result, how could profits hike without potential risks? Therefore, stock investors who have already been involved in a “supposed M&A deal” would then suffer. – Source: Vietbiz24.com

Tags: Vietnam M&A