Why Companies Overpay For Acquisitions

When Microsoft agreed to pay $26.2 billion to acquire LinkedIn last month, we—along with many others—were left scratching our heads. Why would Microsoft pay such a high premium for a money-losing company with slowing growth and the worst user engagement of any major social media platform? Microsoft claims the deal has massive synergies that will justify the purchase price. It seems much more likely, however, that the software giant will end up taking a major write-down on LinkedIn, just as it did last year with Nokia ($7.5 billion) and in 2012 with aQuantive ($6.2 billion). The company has an established track record of destroying value by overpaying for acquisitions. Of course, Microsoft is far from the only company to destroy shareholder value by overpaying to acquire other companies. Most studies find that acquisitions fail to create value for shareholders between 70-90% of the time. We’ve emphasized time and time again that big acquisitions can be accretive to GAAP earnings but actually destroy shareholder value.

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