One reason that stocks of the acquirer may underperform is that investors realize sheer size by no means translates into higher profits. Take the drug industry, one that the United States dominates. Bigness also has a habit of thwarting innovation. Taking sizable write-offs today can make earnings look rosier tomorrow. And some companies use huge restructuring charges that typically accompany mergers as a place to dump regular business expenses, increasing earnings in the process.
Companies sometimes use acquisitions to pick up a new source of revenue.
Those are the kind of interesting tricks that can happen when companies bundle things with an acquisition. Mergers make it easier for companies to create these smoke screens. The tactic used by FPA Medical helped the company for only so long. The company filed for Chapter 11 bankruptcy protection in July. Acquisition of another company's revenues can bolster a stock another way, at least temporarily.