MarketWatch Weekend Investor: Buyer Beware: In Acquisitions, Sellers Frequently Know Best
GOOGLE IS buying YouTube. Chicago Mercantile Exchange Holdings is snaring Chicago Board of Trade parent CBOT Holdings. Eli Lilly is gobbling up Icos. The list goes on and on in what is shaping up to be quite a year for mergers, with deals involving U.S. targets up about 9% this year from last year, according to the Mergers & Acquisitions Report.</br></br>But here's something to keep in mind, especially if you're an investor in an acquiring company: Over time, based on postdeal stock prices, sellers often have proven to be smarter than buyers. That isn't to say there aren't smart buyers, including PepsiCo, which has effectively used acquisitions to diversify and grow. Or J.M. Smucker, the jelly company, which several years ago bought the Jif brand of peanut butter from Procter & Gamble. (Talk about synergy!)</br></br>But the reality is that "the seller always has better information," says Harbir Singh, professor of management at the Wharton School of the University of Pennsylvania.</br></br>Seems obvious enough, but try telling that to investors in companies such as America Online after it swallowed Time Warner in a deal valued at more than $100 billion. Or Mattel, after its misguided $3.8 billion purchase of Learning Co. Or Quaker Oats, after its botched $1.7 billion acquisition of Snapple.</br></br>The difference between a good deal and a bad one often boils down to little more than hubris, or just plain ego, which can cause a buyer to overpay. "It's not that sellers are smarter than buyers," says Richard Roll, a finance professor at UCLA's Anderson School of Management and author of "The Hubris Hypothesis of Corporate Takeovers." "It's just that buyers are overconfident in their ability to value what they're going to buy."