Upon seeing the downside lead to serious limitations over the long term as the market going up and down. The journey up has never been a walk in the park but more of a tiring hike over a treacherous mountain. Even when indices are soaring someone else on the other side of the globe is losing their investments. We certainly don’t want that happening to us. For instance, when the stock you might be interested could hide a rather post explosive revenue growth over the next decade or it could be betting the farm on a weak business structure.
It would definitely be a lot exciting to think of all the money you could earn if everything works out according to your plan, but the thing is they don’t always come according to plan. Examining accurately the possibility and scale of probable downsides is very vital and gauging a potential profit is adequate without looking back at the risks.
Financing deals remain relatively affordable. Quantitative easing strategies as well as loose monetary policy offer borrowing very cheap for large multilevel companies. The market isn’t all worried about corporate risk in terms of credit since many firms can loan for a nominal spread over various Treasuries. It deems very tempting to consider using cheaper borrowing availability option to fund anyone’s empire-building goal.
Outstanding Balance Sheets
A lot of companies don’t even need to loan money to create great deals. Following the scare four years ago, most big companies made incredible efforts to rectify their balance sheets and pay off outstanding debts. Many firms soon started building a good war chest of cash. The move of course can be used to pay out a larger dividend or even do share buybacks.
Banks are obviously not going to hold back their deals. With traditional banking revenue streams getting pinned down by very low rates and new regulations, investment banking ultimately became the key area to focus for many corporations. Along with lucrative fees and lending opportunities, bankers are given a lot of incentives to fuel their aggressiveness to pitch deals.
Flat Stock Prices
It may be impossible to predict when exactly the market will be heading. Flat share prices may make top executives apprehensive and more likely to do something to correct the situation. A big splashy deal shows that a CEO is trying but it may not be the best way to build shareholder value.
There are also several reasons why deals that are agreed are considered to be value destroying in the long run.
High Prices: The stock market is fairly valued at the moment true at least in the US. The upshot to this belief is that there aren’t as many bargains around. There are pockets of value scattered all over but there aren’t really many purchases made which results in a more likely big deal accompanied with a hefty price tag and overpaying is the quickest way to turn any merger worse.
Less Fat to Trim: Synergism is fully ensnared in the lexicon of corporate buzzwords. The idea is that by joining two thriving firms you can cut a lot of corporate overhead and other expenditures in order to save money. This is a great idea, but during the recession, most corporations limit overhead to the core and are still operating at very lean levels, without much cushion to cut out of purchasing firms, the majority of the intended savings may not be reached. But does this mean synergism is a bad thing? Not entirely, history has shown us that many deals end up bad as it even began. Given the confluence of these factors there is a high probability that some bad deals will be seen in the coming months.