Investment update 30 July 2018

Last week in the markets

Over the past week Australian shares increased 0.2% with small company shares up 0.3%. Shares in developed countries rose 0.8% while the US market was up 0.6%. Shares in emerging markets rose 2.1%. The Australian dollar fell 0.2% to 74 US cents. The Australian 10-year bond yield increased slightly to 2.64%, with the US 10-year bond yield rising to 2.95%. The oil price fell 2.5% to 68.69 US dollars per barrel.

Why do companies merge?

One of the biggest stories announced last week was the merger deal between Fairfax Media and Nine Entertainment, creating a new media giant in Australia.

Mergers (two companies agreeing to combine) and acquisitions (one company buying out another) are commonplace. Why do companies merge and how does it turn out?

There are many reasons why companies merge, the main ones being:

  • Synergy – by combining business activities, performance will improve and costs decrease.
  • Diversification – the new ‘merged’ company will have multiple sources of revenue which will help it manage debt better.
  • Greater market penetration – there will be a greater focus in a single area of operations, while also potentially eliminating some competition.
  • Growth – it might be more effective for a company to grow through merging than by growing organically.
  • Efficiency – a larger company will have greater purchasing power and might have more cost-effective operations.

While there can be many benefits associated with merging, not every merger turns out well for investors or the companies involved. Academic research shows that the share market returns associated with an acquisition are, on average, negative. This means that, in the opinion of investors, the acquirer has paid more for the target company than the benefits realised. There can be many reasons for this. For example, the benefits may have been overestimated or the acquirer’s management team may have been overconfident in its ability to capture the benefits.

Our investment managers actively consider whether merged companies and their corporate strategies are sound investments for our members.

 

Signing off

David Bell | Chief Investment Officer

Past performance isn't necessarily an indicator of future performance.

Data sourced from Bloomberg.