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Corporate Mergers: How Big Is Too Big?


While mergers between utilities are typically successful, similar deals in other industries tend to disappoint. That checkered past is worth keeping in mind, as the flow of new deals appears to be ramping up.

But making that work also means dealing with the governments that have ownership stakes in these companies, as well as regulators who will be hyper-sensitive to any signs that a merger would increase layoffs at a time of rampant unemployment throughout Europe. Then there's the problem of merging corporate cultures across national boundaries, a bridge too far for many deals in the past. Bigger just might be too big in this case.

A third major merger in the works is the potential combination of mining giant Xstrata (LON:XTA) and its 33% owner Glencore (LON:GLEN), a leading global commodities trading company. This combination has the obvious advantage of uniting hard assets with the expertise to sell them. But complications have emerged over the offer, particularly how many shares in the combined entity should be allocated to Xstrata shareholders.

The deal appeared to be slipping away up until several weeks ago, as major investors held out for a higher offer while Glencore seemed to balk. But that tension has abated now that Glencore has acted and shareholders appear to be in accord. But the deal still faces a final hurdle that could kill it: European Union approval. And given the size of the proposed combination, there's no guarantee officials won't find that bigger is too big, which will dash investor hopes and sink the shares of both companies.

The bottom line: Betting on industry mergers can be lucrative, provided we're talking about financially healthy and growing companies selling at value-backed prices. But chasing a low-quality outfit just because you think there may be a takeover is rarely ever a good strategy.

There's just too much risk that regulators will decide big is too big and ultimately scuttle the deal. The only merger candidates anyone should buy are those you'd want to own even in the absence of a deal. That way, your wealth still builds over the long term while you await the prospect of a faster payoff.

This article by Roger Conrad was originally published on Investing Daily under the title: Corporate Mergers: How Big Is Too Big?

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