Have your cake and eat it!

Given the overwhelming evidence that returns to acquiring-firm shareholders are generally negative, have you ever wondered why large institutional holders of acquisitive company stock vote through deals, that on the surface reduce the value of their holding?

Recent research* provides a clue to this apparent anomaly.

* Cross-ownership, returns, and voting in Mergers: Conflicts of interest amongst shareholders. - G.Matvos and M.Ostrovsky, research paper # 1921 Stamford Graduate School of Business

Matvos and Ostrovsky show that many institutional shareholders have a hedge against the potential loss arising from holding stock in a public company that announces a merger or acquisition.

The hedge comes about because, by accident or design, many institutional shareholders hold positions in M&A targets. The gains from the rise in stock price of a target, can make up for the loss in stock value of the acquiring company post announcement, hence justifying the decision to vote through, what on the face of it may seem like, a poor deal for the investor in the acquiring firm.

The clear message for the due diligence process of the Chairman and CEO contemplating a deal has never been clearer, 'know your investors,' especially those of the company you plan to acquire!