The Importance of Mergers and Acquisitions

My name is Robert Bonavito, New Jersey forensic accountant. This video is part of a series of videos where I discuss forensic accounting topics for educational purposes only.

A good part of our business in our firm is dealing with mergers and acquisitions for companies going in and doing due diligence, and coming back with estimated cost of capital, that kind of stuff, to see if it's going to help or hurt the company. And the reason that mergers and acquisitions are important, because what it is supposed to do is put the company in the hands of the best owner.

Sometimes companies aren't owned by the best owner, and that's why there is acquisitions and mergers. Now unfortunately, a lot of mergers and acquisitions don't work out, and the reason they don't work out usually is because, when you're buying a company, you are usually paying fair value for that company. And if you're paying fair value, what that means is that they've calculated all the future cash flows, so if you're not a super manager, you're just going to make average returns but you've already paid for those returns.So that's why most mergers and acquisitions don't work out with these big companies, especially on Wall Street.

It's kind of busy work for management sometimes, they buy these companies to keep themselves busy because they have nothing else to do. But, if you look at some of the mergers and acquisitions (and by my estimate, 33% of the mergers and acquisitions on Wall Street destroy value, 33% don't help or hurt, and 33% are improvements), but just to take a look at some that didn't really do that well.

AOL/Time Warner, destroyed $99 billion of value. AT&T likes to buy companies constantly, and two years later they write them off. Well, one of the spin-offs was Lucent. Lucent and ACCTel, that lost $340 million. Microsoft, again, they are always buying companies. I think in the last 13 years Microsoft bought 149 companies, but Microsoft and Nokia was a total disaster.Everybody knew it except the managers at Microsoft.

So when you hear anything about mergers and acquisitions of public companies, usually the stock will go down because most investors realize that it's probably not going to be successful.

But for smaller private businesses, it's sometimes a great way to expand the business. If you don't have that organic growth, maybe you can buy a competitor and expand and reduce the operating expenses, and it will go down to the bottom line. And that's probably why we do so much work in the mergers and acquisition business. If you have any questions concerning this video, feel free to give me a call.