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Merger Mondays and malinvestment

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Susana Bates / Reuters

(Read caption) Microsoft Chief Executive Officer (CEO) Steve Ballmer (L) and Skype CEO Tony Bates shake hands at their joint news conference in San Francisco, May 10, 2011. Microsoft and Skype announced Tuesday that they have entered a definitive agreement under which Microsoft will acquire Skype for $8.5 billion from the investor group led by Silver Lake. Will the deal actually prove fruitful for Microsoft?

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When the money’s cheap, CEOs go shopping was the point I made in a talk given at the Institute’s Houston Mises Circle this January. Despite the fact that from 60% to 80% of mergers fail, CEOs think that when they do a deal two plus two will equal five, the fact is it often turns out that two plus two ends up equaling three.

In today’s ‘Up and Down Wall Street’ column in Barron’s, Randall W. Forsyth takes up the same theme while weighing in on Microsoft’s $8.5 billion purchase of very cool, but never made a dime, Skype.

Knut Wicksell takes center stage in Forsyth’s ‘Microsoft and Malinvestment: CEOs Gone Wild With Cheap Credit‘.

Austrians described this boom and bust cycle as the result of excess credit creation that winds up producing malinvestments that go bust. It actually was a Swedish economist of the late 19th century and early 20th century, Knut Wicksell, that saw central banks as the driver of this cycle, by lowering the market rate of interest below its “natural rate,” which drove credit expansion and pushed up prices, including those of commodities. Through this distortion of market prices for money, artificial booms occur as malinvestments are made, leading to the inevitable bust.

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