Acquisitions and Total Shareholder Returns

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Acquisitions and Total Shareholder Returns

The article discussed in this summary declares acquisitions and cash stockpiling to be among the most beneficial strategy for improving total shareholder returns (TSR) of 2012. S&P 500 companies that engaged in the practices actively outperformed their more passive counterparts substantially throughout the year. However, this success cannot be used to indicate that acquisitions are universally superior tools for increasing TSR. Milano (2013) highlights studies that find acquisition-related declines in price and cash building-associated TSR reductions. However, he also makes the case that the utility of acquisitions is often underestimated. The success in 2012 was at least partially associated with lower activity, which led to reduced competition and improved prices. Hence, in a market where every company targets acquisitions, prices would inflate dramatically, negating the advantages. As such, the practice is situational, with the potential to produce impressive TSR growth in a favorable situation but limited general applicability.

To understand the shareholder impacts of the three items described in the article in a general scenario, additional information is required. For acquisitions, the price-to-book ratio, which was used by Milano (2013) as an example, could be a valuable indicator. A lower one would mean that the company can acquire new resources at an attractive price, and vice versa. To evaluate stock buybacks utility, the company should assess its share price growth, as advised by Milano (2013). They may be used when there is a consistent growth pattern, though this trend is not a reason to start buying back as many shares as possible. Lastly, before cash stockpiling, the company should consider its current potential uses for that cash. It is usually preferable to invest the money into growth opportunities if there are any attractive ones, as the returns will contribute to a higher TSR.

Reference

Milano, G. V. (2013). The envelope, please: The 2012 capital-deployment awards. CFO Magazine. Web.

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