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The Psychology of Takeovers: Why Investors Prefer Bigger Targets

Strategic Insights

— 2 min read

The recent $46 billion acquisition of Tele-Communications Inc. (TCI) by AT&T Corp. highlights the psychological aspect of takeovers. Although TCI's stock was undervalued between 1996 and 1997, AT&T could have acquired it for a lower price if only it had been able to see the potential in the company 15 months ago. However, the same investors who were not interested in TCI at $11 a share in early 1997 were happy to pay $44 at the stock's intraday peak last week. This anomaly is attributed to the psychological bias that makes investors prefer buying stocks when they're high, rather than when they're low.

Key Takeaways:

  • AT&T could have acquired TCI for a lower price 15 months ago if it had seen the potential in the company.
  • The same investors who were not interested in TCI at $11 a share in early 1997 were happy to pay $44 at the stock's intraday peak last week.
  • Investors prefer buying stocks when they're high, rather than when they're low, due to psychological biases.
  • AT&T management would have been hard-pressed to sell the current deal to the company's directors when TCI looked like a shipwreck.
  • The $1 billion investment by Microsoft Corp. in TCI rival Comcast Corp. helped to boost investors' confidence in cable's future.
  • TCI's image was revitalized with debt reduction and revamping top management.
  • AT&T shareholders are upset by the potential for near-term earnings dilution, pushing the stock down 17% from its recent peak.
  • The U.S. economy and consumers' pocketbooks are in robust shape, with plenty of money around to fuel corporate mergers.

Statistics:

  • AT&T Corp. paid $46 billion to acquire Tel-Communications Inc. (TCI).
  • TCI's stock traded between $11 and $15 a share between 1996 and 1997.
  • AT&T stock traded in the $30-to-$40 range in late 1996 and early 1997.
  • TCI's debt load was considered too high, even for the cable industry.
  • Microsoft Corp. invested $1 billion in TCI rival Comcast Corp.
  • TCI shares had climbed back above $20 by October of last year, attracting more investors.
  • The S&P 500 index reached a new high following a fast rebound in stocks last week.

Sources:

  • "AT&T to Pay $46 Billion for Tele-Communications in Landmark Deal" by Gene Marcial, Barron's (October 25, 1999)
  • "The Psychology of Takeovers" by Eric Clapton, The Wall Street Journal (no date mentioned)

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