Most dealmaking turns out badly

We're familiar with the real disasters, like AOL-Time Warner and Sam Zell's takeover of Tribune Co. But a new study by UC Berkeley economists concludes that acquisitions in general often end up hurting a company and its shareholders (stock prices can underperform shares of similar companies by 50 percent for the next three years). Also, deals done in cash tend to do worse than deals done in stock (never a good sign if the buyer doesn't want the seller's stock). From Fortune:

The two Berkeley professors, Ulrike Malmendier and Enrico Moretti, and a professor from the University of Amsterdam Florian Peters looked at situations where there were hotly contested acquisitions. They then compared the winners of the acquisition bidding war to a similar company that had lost out. What they found is that while the shares of the pairs of companies had tended to perform rather similarly before the acquisition, after the deal the prospects of the two companies diverged, with the company that had made the acquisition performing much more poorly than the company than did not.

You could argue that in contested bids acquirers tend to be pushed to pay more, and therefore end up with a worse deal than usual. But the professors compared what was paid in the contested deals they looked at and acquisitions where there hadn't been multiple bidders and found that the valuations put on the acquired companies were about the same. So an acquisition may fail because the acquiring company overpays, but if that's the case, that's a problem with all deals, not just when there is a bidding war.

When managed properly, there's a logic behind buying companies. Businesses need growth to survive, and growth is sometimes made easier - and faster - by buying out the competition. The problem is that acquisitions are sometimes not managed properly; it takes discipline to drop out of a bidding war that's gotten out of hand, and in the heat of battle that's often in short supply.