Youngstown Daily Legal News

Mergers vs. acquisitions

THE MOTLEY FOOL
Ask the Fool
Published: October 15, 2019

Q: What's the difference between mergers and acquisitions? -- H.W., online

A: In general, a merger is when two companies (often of roughly similar size) combine to form a new company, often with a new name and new shares of stock issued. Acquisitions, which happen far more frequently, are when one company takes control of another. While mergers are often friendly and a joint effort, acquisitions can be hostile.

Famous mergers include Exxon and Mobil (forming ExxonMobil), Citicorp and Travelers Group (forming Citigroup), AOL and Time Warner (forming AOL Time Warner), Royal Dutch Petroleum and Shell Transport & Trading (forming Royal Dutch Shell) and Sirius Satellite Radio and XM Satellite Radio (forming Sirius XM Holdings).

Examples of acquisitions include Microsoft buying LinkedIn, Amazon.com acquiring Whole Foods Market and CVS Health buying Aetna. Some acquisitions, such as when Disney bought Pixar or when Daimler-Benz bought Chrysler, are referred to as mergers, in large part to honor the acquired company and let it save face.

Q: I'm new to investing, have several thousand dollars and want to start buying stocks. How should I invest my money so that it's safe and grows? -- C.D., Keene, New Hampshire

A: You'd do well to take some time to read up on investing first. Some stocks are less risky than others, but none are risk-free. Consider investing your money in a certificate of deposit (CD) for a few months or a year while you learn more.

A low-fee, broad-market index fund, such as one based on the S&P 500, is a good way to enter the stock market; for many people, that can be all they need. If you want to learn how to invest in individual stocks, keep reading, and visit us at Fool.com.

Fool's School

Mutual Funds for You

Consider mutual funds -- or a similar alternative, exchange-traded funds (ETFs) -- for your portfolio. Yes, if you invest in individual stocks, they may double or triple in value in a few years, but investing in stocks successfully can take a lot of time and skill.

A mutual fund pools its shareholders' money and spreads it across many securities, such as stocks and bonds. Risk is reduced because if any holding crashes, its effect is offset by that of other holdings. An actively managed fund is run by professionals who study and choose holdings, while a passively managed index fund simply tracks a certain index and holds most or all of the same securities, in the same or similar proportions.

Over long periods, the stock market has averaged an annual return of close to 10%. That's enough to increase your money nearly 1,000% over 25 years. With a simple index fund that tracks a broad-market index, you can earn close to the stock market's return -- and here's a surprise: You'll beat the majority of managed stock funds that way, too. Managed funds charge fees that eat into their shareholders' net gain, and they frequently charge more than 1% per year. Some index funds, in contrast, charge 0.1% or less.

You don't need lots of money to start investing in mutual funds, either. Some funds do require large initial investments -- say, $3,000 or even $10,000. But others require $500 or less. There are often no minimums when you invest in funds via an individual retirement account (IRA). And with ETFs, which trade like stocks, you can buy as little as a single share, for $300 or less -- though the commission on such a small trade might make it not worthwhile.

Good index funds to consider are the SPDR S&P 500 ETF (SPY), Vanguard Total Stock Market ETF (VTI) and Vanguard Total World Stock ETF (VT). Respectively, they can distribute your assets across 80% of the U.S. market, the entire U.S. market or much of the world's stock market.

My Dumbest Investment

Seared by Sears

My dumbest investment was in the stock of Sears. I believed that Eddie Lampert could turn the ailing company around. Nope. -- Dave, online

The Fool responds: Investors in Sears Holdings have had a tough ride. Sears, Roebuck & Co. merged with Kmart in 2005, forming Sears Holdings, and investors were generally optimistic for a while.

Investor Eddie Lampert, controlling a big chunk of Sears Holdings' shares, has been at its helm for most of its life, during which both the Sears and Kmart chains have shrunk to become shells of their former selves. One criticism of Lampert is that he took much of the company's income and used it to buy back stock. That essentially retires those shares and shrinks the company's share count; in a best-case scenario, it would leave remaining shares more valuable. But in this case, he was buying stock back when it was overpriced, destroying value; that money might have been better spent trying to improve and strengthen the businesses.

Meanwhile, the country moved through a recession, and the retailers struggled. While Sears Holdings took in $53 billion in 2006 and posted a profit, it has been losing money for years and shuttering hundreds of stores; in 2017, it took in only $16.7 billion. Sears filed for bankruptcy protection in 2018.

It's always risky to bet on a struggling company turning itself around, so consider just sticking with solid, profitable performers.

Foolish Trivia

Name That Company

I trace my roots back to 1964, when a couple incorporated the Musket Corporation and spent $5,000 to lease a vacant gas station. In 1972, I opened my first Country Store, pairing a convenience store with self-serve gas. In 1981, I launched my first interstate travel stop. Today, based in Oklahoma City, I boast more than 490 locations in 41 states, serving truckers and drivers -- 24 hours a day. I offer everything from snacks to roadside assistance. I employ more than 25,000 people and am privately owned. My companies include Gemini, Trillium and Speedco. Who am I?

Last Week's Trivia Answer

I trace my roots back to the 1963 opening of my first store, in Lowell, Massachusetts. I grew to more locations and added pharmacy departments in 1967. I bought more than 2,500 stores from Revco in 1997 and acquired 1,268 Eckerd stores in 2004. I debuted the first fully integrated online pharmacy in 1999. Today, based in Woonsocket, Rhode Island, I'm the product of a merger with Caremark Rx. I employ close to 300,000 people in the U.S. and beyond and raked in nearly $200 billion in 2018. I stopped selling tobacco products in 2014. Who am I? (Answer: CVS Health)

The Motley Fool Take

The Disney Empire

There's no question that Walt Disney (NYSE: DIS), with a market value recently topping $230 billion, commands an entertainment empire.

Disney's theme parks attract millions of visitors every year. Its TV networks, including ABC, Disney Channel and ESPN, reach hundreds of millions of viewers. Seven of the top 10 largest-grossing movies of all time were made by studios now owned by Disney. And Disney has already made more money from its 2019 films than any other studio ever has in a single year -- and it achieved that milestone back in July.

Disney's acquisition of Twenty-First Century Fox gives the company an even greater content portfolio. Although this megadeal negatively impacted Disney's earnings in its latest quarter, it also enabled the company to deliver impressive year-over-year revenue growth of 33%.

Disney has proven exceptional at leveraging its portfolio of content, which includes power players such as Marvel, Lucasfilm, Pixar and the now-ubiquitous Disney Princesses. Its rollout of its Disney+ video streaming service in November will give it yet another way to make money.

Sure, Disney faces challenges. Its TV networks continue to experience the effects of cable subscribers cutting the cord. An economic recession could cause some customers to cut back on vacation spending, hurting its theme-park businesses. But the long run continues to look very bright for Disney. (The Motley Fool owns shares of and has recommended Disney.)

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