10. Feedback Loops

One model of serial acquisition relies on the acquirers enjoying a high price-earnings ratio which enables them to buy targets with lower price-earnings ratios, resulting in high earnings per share ratios which boost the share price and facilitate further mergers. The process can be combined with the creative accounting devices described in Chapter 9. Earnings management and over-optimistic forecasts ahead of a bid inflate the bidder’s share price, enabling it to buy the target more cheaply in a share exchange. Integrating the target into the acquirer’s accounts then offers opportunities to inflate profits reported post-merger – setting the scene for yet another deal on favourable terms. The process is illustrated with reference to the experience of serial acquirers in the UK and the US, some of which ended very badly.