Wednesday, July 11, 2007

Crossholding An interesting Financial Times article ('The Long View: Crossholdings blunt M&A failures", 7/76/07) makes the following observation: In deals structured as an acquisition, it is easy to see why the target's shareholders acquiesce. They get a premium. But that makes it even harder to explain why shareholders of acquiring companies tolerate such behaviour. After all, their company is saying it will spend their money on paying more for an asset than the market thinks it is worth and the share price generally drops on the announcement. So even if the long-term prospects for the deal is good, it will take a while, in most cases, for stockholders of the acquiring company just to get back to the original price before acquisition talks started. The answer to this riddle, is explained in a recent business school study. According to that research, the article reports, the shareholders of both the buying and the selling company are often the same investor. Looking at mergers in the US from 1981 to 2003, the researchers found that shareholders in the acquiring firms lost money and did so significantly. But cross-owners, who held shares in both acquirer and target, generally profited. And how prevalent s this situation? The article reports that in the average transaction, cross-owners own 12.1% of shares in the acquirer and 15.5% of shares in the acquiree. And in the 100 biggest deals, it's far more striking. "for the 100 biggest deals, cross-owners accounted for 42.2 per cent of the buyer and 45.7 per cent of the target." Those who one stock in the acquiring company only may have good reason to vote against the deal, but crossholders have very strong incentive to vote yea. The article cites the 2003 acquisition f Fleet Bank by Bank of America. As BoA's stocks slid, so Fleet's went up, almost in the same proportion. Those how held large shares in both companies, but more in Fleet (and there were many), did very well off the deal, even though BoA shareholders in general did badly. The causes of this sudden spike in crossholding has to do with the fact that any mutual funds and other investment funds have a generally passive attitude to the industries they invest in, that is, they spread the risk around. So when many of these acquisitions are made, the valuation is being transferred from one pocket to the other of the same investor. ( Of course, some cash trickles down on the dealmakers and their friends.) 8:34:12 PM

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