Mis-valuation Affects the Failure of Merger and Acquisition Activities - Essay Example

Vishny (2003) states that misvaluation effects play an important role in market approaches in the short as well as in the long run since they are often driven by managerial optimism whereby the managers intend to satisfy their immediate financial benefits and this often leads to failure in the long run. Reasons such as differences in accounting principles, misvaluation of stocks and managerial approaches have been observed to be the main causes of failure of mergers and acquisitions. In some cases, organisations may be undervalued or overvalued but the truth of the matter is that markets are not static as they can change at any moment.

The research methodology has been based on secondary research which focused on the merger of Time Warner and AOL.  The findings of the study show that this merger failed as a result of managerial optimism whereby the CEOs of Time Warner and AOL used their overvalued stocks to merge their organizations. The managers assumed that their organisations will perform well in the future. Their assumptions were based on the notion that the trend will continue like that but that was not the case. Indeed, the internet Bubble was so promising in the beginning but the trend later changed due to different market forces. It has been observed that the merger of Time Warner and AOL failed as a result of the overvaluation of the organisations since the trend did not last long. Therefore, it has been recommended that research has to be conducted in order to establish the measures that can be implemented in order to safeguard the interests of both organisations intending to merge so that they are not misvalued.