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Mergers can boost profits
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March 31, 1997: 1:58 p.m. ET
Whether deal was friendly or hostile, cash or stock, affects shareholders
From Contributing Editor William S. Rukeyser
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NEW YORK (CNNfn) -- If you're a stockholder in a company that's just been taken over, what should you do to make money on the deal?
A new study points out that whether a merger is friendly or hostile -- and whether compensation is in cash or stock -- has a lot to do with how much it pays off.
"If your company is taken over for stock, I would sell unless I had a great reason," financial planner Lewis Altfest said. "I'd ignore what the chief executive officer had to say."
That strategy has just gotten powerful backing through a study of 1,000 takeovers by University of Iowa finance professors Tim Loughran and Anand Vijh.
They found that if a takeover was friendly and the acquiring company paid in stock, five years later the stock was up 61 percent. That is much less than the stock of similar companies that made no acquisitions at all.
Back in 1988, Unisys Corporation merged with Timeplex Inc., a computer network supplier in a friendly exchange of stock. Five years later, Unisys stock had plunged by 55 percent.
At the opposite extreme, if the takeover bid was hostile and for cash, the acquiring company's stock typically soared 146 percent, according to the Iowa study.
Philip Morris for example, bought up Kraft Foods in a hostile cash takeover in 1988. Five years later, Philip Morris shares were up 173 percent.
Investors might want to bear that in mind if Oracle CEO Larry Ellison makes good on the unfriendly bid for Apple Computer he announced he was considering last week.
What causes the different outcomes? Buyers who pay cash may drive a harder bargain and pay less. But one merger-maker pins the difference mainly on what he calls the "social bargains" that often preoccupy CEOs arranging friendly mergers.
Key factors include "who's going to be on the board, who's going to occupy certain positions, whether or not the CEO job is promised several years in advance," said Lewis Coleman, co-head of investment banking at Montgomery Services.
"In a cash tender offer, particularly an unfriendly tender offer, they're not trying to merge cultures, and there's not a lot of confusion over who has what job," Coleman said.
The study suggests ironic advice for the target company's shareholders: if the acquirer gives you its stock, you should sell it. But if you get cash, use it to buy the acquiring company's stock. 
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