Shareholders should be afraid. It appears that the nascent sharemarket boom is starting to encourage M&A (better known as merger and acquisitions) chatter.  M&A is a handy way for investment bankers to charge enormous fees and for executives to increase their remuneration (on the flawed basis that they run a “larger” company) — usually, it doesn’t work out so well for shareholders, especially those who own shares in the acquirer.

Phillip Barker in the Financial Review noted “rising sharemarkets, repaired balance sheets and better business conditions have led to a pick up in merger and acquisition activity”.

The usual rationale for merger activity is that synergies will result from the combination of two entities. Most commonly cited synergies are a reduction in head office expenses (sacking managers of the target) or saving in distribution costs. In reality, the only time a merger will actually benefit acquiring shareholders is where the new company has monopoly pricing power, or the acquisition is an earnings accretive “bolt-on” of a smaller firm. In most cases, the alleged synergies that flow from a transaction are vastly overstated by over-excited managers and fee-hungry bankers. As Warren Buffett told shareholders in 1997:

In some mergers there truly are major synergies — though oftentimes the acquirer pays too much to obtain them — but at other times the cost and revenue benefits that are projected prove illusory. Of one thing, however, be certain: if a CEO is enthused about a particularly foolish acquisition, both his internal staff and his outside advisers will come up with whatever projections are needed to justify his stance.

Only in fairy tales are emperors told that they are naked.

Investment bankers would presumably disagree, possibly because they are paid to grease the wheels for such transactions.  David Pace, a director of Greencape Capital told Barker that, “corporates want to see a little more proof behind the recovery before they start on M&A. But there’s a fine line in that equation: if you wait to long, you’re obviously going to pay more”.

That sounds eerily similar to what a real estate agent would tell a naïve first home buyer — “you better buy this one, property prices never fall”.

Goldman Sachs, the firm once dubbed “a great vampire squid wrapped around the face of humanity”, is also cheerleading a new M&A boom. Apparently, according to a report produced by the broker-come-vampire-squid, “large cap stocks that show up as M&A targets have outperformed the sharemarket by 12% over the past month [and] the returns a potential bidder could generate if they paid a 20% premium to the current price increased price, increased gearing where possible and met their analysts’ current earnings forecasts.”

Yes — you read that right — Goldman Sachs, the firm that made tens of millions of dollars last year raising equity for foolishly over-geared companies is now suggesting those very same companies would achieve strong returns from more (presumably also foolish) over-gearing. These guys give used car salesmen a good name.

Further, the fact that M&A targets have outperformed in recent times is hardly a surprise — the possibility of a bigger idiot coming along (laden with shareholder money and possibly a hefty line of credit) is no doubt helping those company’s share prices deviate from their intrinsic values.

Next time an investment banker comes knocking, shareholders should hope that their highly paid company directors treat them with the same caution as they would a real estate agent offering an appraisal.

*Adam Schwab is the author of Pigs at the Trough: Lessons from Australia’s Decade of Corporate Greed