Now it starts to get interesting here, so fasten your seat belts. A third company, Teck Cominco, a leading producer of zinc and metallurgical coal and yet another Canadian Company has offered to buy Inco Ltd. but the offer is contingent on Inco dropping the Falconbridge offer.
Falconbridge is 20% owned by Xstrata, a diversified Swiss mining company. Xstrata had some agreements which would have made it expensive to bid for the balance of Falconbridge. Those agreements expire today, May 15, 2006. The metals world is giddy with excitement wondering if Xstrada will enter a bidding war with Inco.
This begs the question of whether mergers are good for investors. Research has shown the the acquiring company usually underperforms for up to five years after they make a large acquisition.
If you are looking for investment ideas, the company being acquired often gives some out performance to investors in the time leading up to the mergers. However, if the deal falls apart, the stock price often falls back to below where it was previously trading.
Depending on how they are financed, acquisitions can be neutral or bad for bonds. If the company issues equity to finance the cost, that is bond holder friendly. If they spend cash or issue debt , leverage can increase significantly and that would be bad for bond holders.
The relative credit ratings of the two companies can be bondholder good or bad. If the acquiring company has a better credit rating and doesn't increase leverage to make the purchase, that can be bond holder friendly. The opposite can also be true.
Hope this gives you some thoughts to chew on.
Now go out there and make some money.
Comment Preview