Conseco, a U.S. insurer, made a mistake when it bought consumer-finance company Green Tree Financial in 1998. Conseco's stock collapsed. Conseco hung a for-sale sign on Green Tree earlier this month. The most appalling thing about the blunders Sirower describes is that they seem so obvious. The explanation of how company bosses make a losing bet two times out of three is stunningly basic.
Most acquirers pay a premium to the market price for the target company.
Step back and digest that for a minute. The market price, or value of a listed company, reflects assumptions about that company's future cash flows. Paying a premium on top of that market price means that the acquiring company must make good on its original assumptions about the target company's cash flow and then squeeze additional earnings from the acquired assets. The higher the premium, the more synergy required to justify the acquisition. In many deals, acquiring companies would have to earn unprecedented returns to create shareholder value.