Not a great understanding of capitalism here

The impact of the Whole Foods acquisition has already been dramatic. After the deal was announced, the value of Amazon’s stock went up by more than the purchase price, which means the deal paid for itself. The value of Amazon’s closest competitors, including Target, whose stock dropped by 10 percent, and Walmart, whose stock dropped by 5 percent, fell by an even larger amount.

This is not what is supposed to happen. Amazon’s stock is supposed to drop with the acquisition of a troubled company.

Err, why?

Something which increases the value of Amazon should make the stock price rise, something that diminishes it fall. Very much he majority of corporate purchases destroy value for the purchasing company thus the general observation that the stock price of the acquiring company falls. But there’s no “should” about it, it’s just a general observation. If it is though that this deal will boost Amazon profits then the price will rise. As people obviously do think because the price has risen.

14 comments on “Not a great understanding of capitalism here

  1. ‘After the deal was announced, the value of Amazon’s stock went up by more than the purchase price, which means the deal paid for itself.’

    Only if they sold it today. Dumbass. Stock valuations are not cash accounts; the stock can go down tomorrow.

  2. “Only if they sold it today. Dumbass”

    Beat me to it. This is the thinking which believes the national wealth drops by 5% if 5% is wiped off share values.

  3. Possibly it is an pbservation that in practice in very many cases the only shareholders to do well oit of acquisitions are the bought out ones.

    Oh and the senior management of both companies.

  4. The company doing the take over’s stock drop because investors doesn’t believe in the long term prospect of the combined entity or that they overpaid.

    In this case, investors obviously thought it was a great move and punishes all of the other groceries company’s price.

  5. Owners and managers of successful well managed company look at struggling company and think “we can do better with those assets”. Investors agree, share price goes up. Film at 11.

    As others have said, most takeovers tend to be vanity purchases by managers who aren’t paying attention to their own company and overvalue what they are buying.

    Mergers are even worse. Value is going to be created by saving on shared costs, especially IT, streamlining and other buzzwords produced consultants. In practice they generally fail as management degenerate into internecine warfare over senior positions, IT managers suddenly discover that systems can’t be integrated, despite weeks of due diligence, and there’ll be large costs rather than savings. Investors have seen this too often and punish the share price.

  6. Managers learn afterwards that support is a function of the number of people. E.g., it takes one HR person to support 100* employees. When you merge 200 employees, it STILL takes one HR person to support 100 employees, so you still need all the staff.

    Just because you merged doesn’t mean people need less help.

    *Made up number.

  7. The last statistic I saw, maybe 20 years ago, was that 85% of acquisitions fail to meet the planned benefits.

    Anyone who knows the difference between corporatism and capitalism will be surprised that so many acquisitions succeed.

  8. Gamecock: it STILL takes one HR person to support 100 employee

    Most likely you’d go from needing 2 HR people to needing 3. The expanded HR department will need an over-manager.

  9. A side point:

    In reality most companies would do better without an HR department at all.

  10. Bloke in North Dorset beat me to it. If the purchasing company has got its facts and he or right it’s stock price ‘shiuld’ rise; not fall. That the opposite happens more often than not is a damning indictment of the idiocy of the bureaucracy that really governs large corporates.

  11. ‘In reality most companies would do better without an HR department at all.’

    I knew it was over when the personnel office became human resources.

  12. Also why would anyone use the stock price on the day to judge the success of an acquistion – that just tells you the reaction (or possibly a totally unconnected fact like the purchasing company has just announced record profits)? Wouldn’t you judge the stock price down the line?

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