More on mergers and the growth fetish

As a follow-up to this post (which was part of a larger thread), this NBER paper (courtesy, I believe, of Felix Salmon or Brad DeLong) suggests that the business case for many if not most mergers is decidedly weak.

The study by professors at the University of California, Berkeley, concludes that acquisitions, while nearly always initially cheered by investors, end up hurting a company, and in particular its share price, in the end. Winning by Losing, which was released this week by the National Bureau of Economic Research, found that following an acquisition the stock of that company tends to underperform shares of similar companies by 50% for the next three years. Another finding of the study: Deals done in cash, which is often considered a more conservative way to pay for acquisitions, tend to do worse than deals done for stock. If an acquiring company doesn't want its new owners' shares, you shouldn't either.

Of course, just because the market overvalues acquisitions doesn't mean that it overvalues growth in general, but this is another piece of evidence for the pile.