“Acquisition is like entering in marriage…” said by one of the very reputed fund manager. According to him most CEO’s don’t need any encouragement to acquire. They are predisposed to it already. There is only one compelling reason to make an acquisition. You are receiving more than you are
giving away. Only then does a company add value for its shareholders.

With recent globalisation in last decade, Indian corporate has spent $129 Billion in acquisitions outside India. I was going through this article recently which explains how Indians managed their acquisitions outside India.

You will find many promoters and management talk about synergies and how these acquisitions can help them to achieve their goals and grow value for shareholders. Have you seen management or company willing to buy two times X for a company which is trading for 1.5 times X in the market?

As soon as takeover is announced, you will notice that media starts sharing its view with help of independent valuations and comparing them with historically paid price for similar size of acquisitions and most of the time trying to justify management’s quotes.

As a shareholder, it is your money and you need to really look and do the due diligence whether the management is buying at premiums or discount. Because independent valuations and going with management decision does not make any logic to me.

The drivers that influence management to take decisions are different then of shareholders. You will also notice management and advisers coming out and talking about combination of company will save lots of money. My observation to these savings is eroded more often by paying premium price or in
big cheques issued to management for successfully completing the deal.

There is a big corporate graveyard which is filled with corpses of acquisitions that made sense at the time.

Let me share recent example and have also shared my views previously while acquiring this company that it does not make sense to pay such high price for loss making entity. I am talking about JSW ISPAT Steel.

A heavily debt burdened company and is reporting losses from last 3 years and looks as if will report losses for the fourth year. Before announcement of takeover by JSW Steel, ISPAT was trading at Rs 17.50 per share. (Book Value as of June 2010: Rs 13.25 per share)

An offer of Rs 22.25 per share for loss making entity and burdened with heavy debts did not made any sense to me. By March 2011 price of stock went up to Rs 23 levels. If you were shareholder of ISPAT, then you were lucky for getting opportunity to cut down your losses.

The performance of share price of JSW steel as a separate entity also did not show any synergy in acquiring ISPAT even after 15 months. Have a look at this interview during that time by JSW management and listen to their thoughts on this acquisition.

My question to all value reader is, how do you look at M&A and what is your approach towards it. For me, a business which is making loss should not be bought at premium to its Book Value, arguably at very less. JSW Steel has destroyed value instead of creating by acquiring ISPAT. Looking forward for your input on this subject.