Beware the takeover talk

There’s often a lot of fanfare when a listed company proposes a merger or acquisition. However, Simon Brown advises investors to scrutinise the rarely-attainable promises that tend to come with a proposed deal.

- Simon Brown

In my “Simon Says” column in this issue (see p.18 and 19) I write about companies – such as Choppies, AngloGold Ashanti, Intu and Ascendis – divesting from assets they’d bought and which they claimed as great additions to their business model at the time of purchase. Then, suddenly, they reverse track and start selling them. This raises a number of issues that investors need to be careful of.

The first has, perhaps, been the biggest lesson of the last part of the last decade: management promises.

Every deal ever announced has always come with great fanfare, promises of synergies and, ultimately, more profits. However, it typically takes several years before the deal delivers those profits. In addition, company management seems totally ignorant of any potential risks but, as hindsight shows us, the risks are not only significant but almost always end up being the reality – as opposed to the wonderful profits.

Frankly, the first thing investors need to worry about is the reason why a company has chosen to pursue the deal.