8. Inefficient Mergers in an ‘Efficient’ Market

This chapter advances a claim which is contentious and at first sight counter-intuitive: that a stock market which is in a certain sense ‘efficient’ can facilitate and stimulate M&A which brings no gain in operating profit for the merging firms, and sometimes losses. It explores different notions of efficiency, drawing on the writings of Tobin and Fama. Incomplete information or misinformation afflict the M&A process in a number of ways. The limited information available to investors in ‘semi-strong efficient’ stock markets can give rise to overreaction and volatility in share prices unwarranted by the variation shown in the subsequent earnings the prices are supposed to reflect. This fosters acquisitions where insiders take advantage of their superior information to buy a target using their own overvalued shares as currency, or to buy a target which is ‘undervalued’ in light of their private information. In neither case need the motive have anything to do with increasing operating profit. Statistical evidence is provided on the excess volatility of share prices. And illustrations are given of acquisitions taking advantage of this volatility.