VideoFor years, there has been plenty of anecdotal evidence of what might be called merger malaise--that palpable office slump when morale drops and productivity slips. Now a study by three accountants-turned-academicians has produced quantifiable results with a resounding conclusion: The longer it takes to seal a merger, the more the deal's value erodes.
Randolph P. Beatty, Hemang Desai, and Steven L. Henning, of Southern Methodist University's Edwin L. Cox School of Business, in Dallas, surveyed 328 mergers of publicly traded companies between January 1990 and January 1997, searching for financial evidence that companies falter once they learn they've been targeted for a merger. "We knew when we started what people's perceptions of behavior were once a merger was announced," says Beatty. "We wanted to know if we could identify accounting measures to corroborate those perceptions."
Beatty and his colleagues examined profitability and sales revenue to determine the impact of an acquisition announcement on targeted companies' cash inflows. They found that, on average, companies that took more than 90 days to seal a merger from the day of the public announcement to the final purchase date saw the targets' profitability drop 1 to 2 percent on an annualized basis and sales revenue fall by a whopping 8 percent.
Beatty says there are two major reasons for these declining numbers. For one, competitors jump in after a takeover announcement to lure nervous customers away from target companies. At the same time, the target's management, believing they will ultimately be dismissed, consider incentives to stay lacking in credibility and quickly abandon normal planning initiatives to look for other employment.
To Beatty, this underscores the critical connection between employee incentives and maximizing company value--even during normal operations--as well as the importance of speed in finalizing a merger. "It's not that we're surprised by this," he notes. "We're just glad to finally have numbers to back it up." —Leslie Schultz
Market Mover
You know the CFO has arrived when rumors of his demise catalyze a sharp drop in a company's stock price. The unfounded rumor early last month that Oracle Corp. CFO Jeff Henley had abruptly resigned tanked the stock by 13 percent at one point during the day. Oracle issued a statement clarifying the matter, and Henley himself said, "Somebody has been floating rumors that are totally false. I think it's a nervous market or short sellers trying to create [an opportunity]." Nearly 150 million Oracle shares traded hands that day, activity that was fueled further by the rumor that Oracle CEO Larry Ellison had died.
Two things were at play here: One, the status of the CFO as the standard-bearer of financial integrity has risen to the point that his or her sudden departure is seen as a sign of very bad things to come.
Two, the markets have become so volatile that almost any news stimulates buying and selling. But unlike the press release hoax involving Emulex Corp. in August, this event had no pretense of official substance. One annoyed securities analyst told CFO.com: "This is total hedge-fund nonsense. This story should die." —George Donnelly
Divide and Conquer?
Investors have been reeling lately over the volume of opportunistic stock splits--and we aren't talking the usual twofers. Many small companies have been trying to influence market interest with splits that range anywhere from a modest 4-for-1 (Rambus Inc.) to a middling 15-for-1 (stereoscape.com) to a dizzying 100-for-1 (Biofiltration Systems Inc.). But can the companies involved expect any measurable benefits from splits?
"The stock might get a bounce from a split," says Carl Hagburg, a Jackson, N.J.-based investment consultant and publisher of Shareholder Service Optimizer. "But in the case of a 100-for-1, you're going to get the bounce of a dead cat."
Indeed, Sarasota, Fla.-based Biofiltration's mathematical turn took its stock from $12 per share to 12 cents per share last April, attracting a slew of speculators but no serious investment funds to this marketer of waste-treatment and wireless Internet technologies. (The company still reports operating in the red.) On the other hand, Mountain View, Calif.-based Rambus--a developer of chip-connections technology whose stock went public at $12 per share in 1997, only to hit $230 per share before this summer's split flattened it to $51--was looking less for bounce than for rationality. "We wanted to quell volatility," says CFO Gary G. Harmon. Did it work? "That's hard to measure," he says, admitting, "It probably had a neutral effect at best."
Which leaves many observers wondering why companies even bother with this costly exercise. Hagburg notes that stock splits result in added issuing and listing fees, yet generate no stock market value. "They're economically irrational," he says. "They attract individual investors who see them as a bullish sign that the company expects the stock to go up. But a $60 stock that splits in half is not twice as good as the two $30 stocks it becomes. Investors can buy more stock after a split, but they don't get a better deal." —L.S.
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