Transaction Risk

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.