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A Word of Warning for M&As

Inflating stock prices before an M&A is a gamble.

The decision to inflate the price of stock may seem like a good choice when a company is weighing its options before a merger or acquisition, but that decision comes with the risk of potential goodwill write-offs and legal

The decision to inflate the price of stock may seem like a good choice when a company is weighing its options before a merger or acquisition, but that decision comes with the risk of potential goodwill write-offs and legal action later, CFO World reports.

The source points to a recent study from two New York-based researchers, titled Overpriced Shares, Ill-Advised Acquisitions and Goodwill Impairment, which concluded that it may be better to avoid overpaying and overpricing completely when planning an M&A.

"Corporate acquisitions with overpriced shares - many leading to goodwill write-offs - exacerbate the post-acquisition negative returns beyond the overpricing correction," the authors - Baruch Lev of New York University and Feng Gu of State University of New York Buffalo - say, as quoted by the magazine.

But organizations that were previously considering entering an M&A - investment banks in particular - may want to rethink their plans. Reuters reports that investment banks that have maintained their independence and focused more closely on deal making rather than mergers are performing better than competitors.  

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