Saturday, March 03, 2007

Are corporate mergers good for the economy?

The Globe and Mail ran an op-ed column last month that said no. Jim Stanford, an economist for the Canadian Auto Workers Union asserts that mergers and aquisitions generate little real economic utility, but serve only to consolodate wealth into a limited number of hands.

Regardless of whether or not you agree with all of his conclusions, his editorial is worth reading for the perspective he offers; that not all the growth in share prices on the market are derived from long-term fundamentals.

The current M&A boom is reminiscent of a similar binge in the late 1990s, just before the dot-com meltdown. At its peak in 1999, Nortel Networks paid $3-billion (U.S.) for a software start-up (Qtera) with no revenues and 170 employees. We all know what happened to Nortel. Back then, intoxicated buyouts were justified on the basis of the Internet's awesome value-creating potential. Replace the word "Internet" with "mineral," and you could sing the same hymn today.
Somewhere around the corner, a price will again be paid -- when resource prices tumble, and bullish spreadsheets that underline today's inflated valuations suddenly turn to slag. The Toronto Stock Exchange hits new highs almost daily, with rumours of still more takeovers (aluminum could be next) fuelling the fire. Just don't bet your RRSP this frenzy will produce any lasting value on which to retire.


Read the whole thing here

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