Whatever.com has extra cash. It can pay a dividend. It can buy back its own stock. It can buy a competitor.
Example:
Cendant Corporation. Largest fraud case in modern history in corporate America. The company, which owns rental cars and office space and insurance things and travel things, had a nice "subscription-like" business. It wanted more growth. So it bought CUC (Comp-u-card), one of the early AOL partners who used Groupon-like discounting to market to subscription members all around the world. The transaction was done as an MOE, or Merger of Equals, as the market valuations of both companies was about the same at the time.
The problem? CUC was only actually "worth" about 1/5th of the valuation it had convinced Wall Street to accord it, because it had taken massive merger reserves while it had built its own business over time. That is, it grew by acquiring tons of small companies, overstating the banking and "restructuring costs" (i.e., firing people). That number kept growing and growing on the balance sheet, and investors kinda just ignored it.
Eventually, when the real audit was done, the chickens came home to roost (and poop all over the place), and it came clear that the company was only about 1/3 as profitable as it said it was. So the stock prices of the combined companies went from somewhere in the mid $40s to middle-single-digit-midget status.
And yes, there was massive transaction risk there. For way less money, Cendant (which had no fraud) could have bought back half of its own stock and been just fine as a company...but they took the risk and got bitten. Bad.
Related or Semi-related Video
Finance: What are Systematic and Unsyste...14 Views
finance a la shmoop what are systemic and unsystematic risk systemic risks are
just endemic to the market want to invest in the stock market and compound [Plate of vegetable appear]
return your way into great wealth great but then you'll suffer the normal risk
of the system that risk specifically is this yeah best of times worst of times
but up over time the market goes up you just have to embrace the notion that [Man hugging a tree]
there is systemic risk in that in the short run you can buy an S&P 500 index
fund here then lose like a third or whatever of your money in not too many
years but if you don't panic and sell just at the wrong time here right out
the storm and keep going well then you should be just fine by the time you
arrive here so that's risk that is always in the system equities rise and [Equity in the ocean]
fall like the tides or something like that but generally they rise and if you
want to swim in this bathtub well you get used to the turbulence and have an [Girl swimming against the tide]
airsick bag handy all right that systemic risk or systemic risk
what's unsystematic risk well it's bad investors or rather bad investing it's
panicking and selling your stock just when you should be doubling down its
buying lousy companies thinking that they're cheap today but not realizing [Woman runs away from smelly girl]
that they will always be cheap because they're lousy or in a lousy industry or
run by lousy management it's buying into lousy industries that also look cheap
but are dying hello paper and pulp is yeah anyone really think that's gonna be [Paper printing]
around in 20 years all right well it's believing the dreamy hopes and prayers
of future earnings and trusting that there really will be 5 million [Traffic on the highway]
driverless cars on the road in 3 years you know good luck with that we'd love
it to be true but ain't gonna be unsystematic risk is also investing in
bonds for the long-term taking very little risk when taking little risk is
the opposite of what you should be doing when you're a young investor so yeah
systematic and unsystematic risk both exist plentifully and both can bite you [Dog bites portfolio from woman]
right in the portfolio so you got to know what both are and embrace them
for what they're worth
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