“You can’t buy a company merely by buying its shares”

(Sir James Goldsmith (1933-1997), Anglo-French financier)

In the 1960s, a big wave of takeovers in the US created conglomerates – collections of unrelated businesses combined into a single structure. Many of these conglomerates consisted of too many companies and not enough synergy. After the recession of the 1980s, there were many large companies on the US stock market with good earnings but low stock prices.

Such conglomerates were not maximizing stockholder value. The individual companies might have been more efficient if liberated from central management.

Conventional financial theories argue that stock markets are efficient. Raiders in the 1980s discovered that it was untrue. Although the market could understand data concerning companies’ earnings, it was highly inefficient in valuing assets, including land, buildings and pension funds.

Theoretically, there was little risk of making a loss with a buyout. The ideal targets for buyouts were companies with huge cash reserves that enabled the buyer to pay the interest on the debt, or companies with successful subsidiaries, or companies that are not sensitive to a recession, such as food and tobacco.

Takeovers using borrowed money are called ‘leverage buyouts’ or ‘LBOs’. Leverage means having a large proportion of debt compared to equity capital. If a company is bought by its existing managers, we talk of a management buyout or MBO.

Raiders and their supporters argue that the permanent threat of takeovers is a challenge to company managers and directors to do their job better and that well-run businesses are at little risk. The threat of raids forces companies to put their capital to productive use. Fat or lazy companies that fail to do this will be taken over by raiders who will use assets more efficiently.

LBOs, however, seem to be largely an American phenomenon. German and Japanese managers and financiers, for example, seem to consider companies as places where people work, rather than assets to be bought and sold. Hostile takeovers and buyouts are almost unknown in these two countries, where business tends to concentrate on long-term goals rather than seek instant stock market profits. Workers in these companies are considered to be as important as shareholders. The idea of a Japanese manager restructuring a company, laying off a large number of workers (as frequently happens in the US and Britain), is unthinkable. Lay-offs in Japan are instead a cause for shame for which managers are expected to apologize.

Comprehension:

1. What is a conglomerate?

2. What are stock markets inefficient in?

3. Are companies with huge cash reserves the ideal targets for buyouts?

4. Is there any difference between ‘LBO’ and ‘MBO’?

5. The permanent threat of takeovers is a challenge to a company, isn’t it?

6. Why do you think LBO is a typically American phenomenon?

7. What is the status of workers in German and Japanese companies?

Summarizing.

Complete the following sentences to summarize the text above:

1. Takeovers in the USA created…

2. After the recession of the 1980s many companies had good earnings but low…

3. In the 1980s raiders discovered that stock markets were…

4. Theoretically, with a buyout there is little risk of…

5. If takeovers use borrowed money, they are called…

6. We talk of a management buyout when a company is bought by….

7. Hostile takeovers and buyouts seem to be typically… phenomenon.