Shareholders in a muddle over what to do with cash!

It seems that some companies have been piling up the cash and are
now fighting over what to do with it. An article in The Economist
reported that American firms are sitting on nearly $1 trillion. Many of those with cash to spare are opting for M&A.

This seems counterintuitive as it is well known that M&A works
well about a third of the time. The rest of the time it results in more
harm than good. So why would companies want to invest in M&A?

The reason? Shareholders are rewarding companies
for making takeover bids – despite their usual preference towards
receiving dividends. This reverses traditional market positions of
reducing companies’ share prices when bids are made, and it suggests
that the shareholders want companies to use the piles of cash they have
accumulated on their balance sheets for a long-awaited return from
M&A activity.

And the difference in share price is really quite significant.
Companies making takeover bids this year have seen their share prices
outperform the market by an average of 21% over the 28 days following a
bid announcement. This is in contrast with traditional market reactions,
where bidders have tended to suffer an underperformance in their stock
prices following an announcement of a deal. During 2000 to 2008 bidders’
stock prices underperformed the market by 1% over the 28 days following
an announcement. It also looks like M&A is going to increase over the next twelve months with nearly one in six European companies planning a large scale acquisition.

And it’s not just the bidder who benefits. Target companies have
also outperformed the market by an average of 17.5% over the 28 days
following a bid compared to an average of 11% for the period 2000-2008.
There seem to be benefits all round but are they not forgetting about
the large proportion of failed M&As? Maybe they should consider the
financials as well as the people side of the business before they make
their bid.

A research report
by CFO Research Services in collaboration with Aon Hewitt found that
most respondents reported that there was room for improvement in
managing Human Capital (HC) programs during M&A activity, with both
HR and finance working together to recognise the value of this data.
Many finance executives urge their counterparts in HR to claim a seat at
the M&A table and it is time that HR stepped up to this
responsibility, but in return finance should draw more on HR’s
expertise.

If M&A activity is something that is going to increase over
the next 12 months despite the high risk of failure then organisations
should really gather as much data as possible when making their
decision. This includes people data – bring HR and Finance together on
this one!


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