Main Reasons for Mergers and Acquisitions - Research Paper Example

Finnc nd growth strtgy Mny compnis' stocks bdly undr prform th mrkt ftr big mrgr. Th 30 lrgst dls of th pst fiv yrs hv on vrg undr prformd Stndrd &Poor's 500 stock indx. Yt th trnd is mor complictd thn tht numbr suggsts. It includs som spctculr succsss nd som spctculr fumbls. Grg Ip Globliztion hs ld to sound incrs in th numbr of cross-bordr M& ctivitis Howvr, sinc M& ctivity is still msurd in billions of dollrs pr month it is not clr wht impct ths dls ctully hv in prctic. Mor nd mor oftn th studis show tht mrgrs do not crt conomic vlu, but only dstroy it. Of cours ths findings dpnd on th sctor nd th typ of M& tht ws don. Mny fctors ply n importnt rol in th furthr succss of th compnis, nd th on, myb th most importnt cn b th knowldg nd bility to crt vlu ftr. Mrgrs nd cquisitions, two forms of rstructuring, rprsnt both strtgic opportunitis nd thrts for compnis, s ownrship chngs hnds. Mrgrs nd cquisitions crry on stting nw rcords in both volum nd siz. cquisitions probbly r not th quickst wy to grow comprd to othr options nd, from th prspctiv of top mngrs, thy r stimulting nd oftn finncilly rwrding. Howvr, by most ccounts, cquisitions r pron to filur, with som hving disstrous consquncs. Studis of th short-trm ffcts of M&s point out tht M&s gnrt vlu, vn though most of this vlu ccrus to th trgt firm. Rsrch in th US nd UK indicts tht th shrholdrs of th trgt firms xprincd gins of btwn 16% nd 45%. cquiring firms' shrholdrs, on th othr hnd, xprincd bnorml rturns rnging from -1.1% to 7.9%. Th combind firms' bnorml rturn ws btwn 1.8% nd 3.5%. (S Jnsn & Rubck 1983; Frnks & Hrris 1989; Bchr 2000; Mulhrin & Boon 2000; Kohrs & Kohrs 2000; ndrd t l. 2001.) Th long-trm ffcts of M&s in th US nd th UK hv bn xmind xtnsivly (S grwl, Jff & Mndlkr 1992, Brns 1984, Frnks, Hrris & Titmn 1991, Grgory 1997, Knndy & Limmck 1996, Limmck 1991, Lodrr & Mrtin 1992, Loughrn & Vijh 1997, Mitchll & Stfford 2000, Ru & Vrmln 1998). Ths studis, lthough criticisd th mthodology, ll indict tht th shrholdrs of th cquiring firms in most instncs los vlu. Th ngtiv typicl rturns wr s high s -20%. Th crtion of ngtiv typicl rturns holds tru spcilly whn th mthod of cquisition ws othr thn by mns of tndr offrs. Th min rson for M& to tk plc is xpctd synrgis, mngril hubris, nd promising solution of gncy problms. Synrgis r th prim motivtion for th bid nd s rsult for th trgts nd th biddrs tht shr th wlth gins. lthough most bidding compnis mk th sttmnt bout th potntil synrgis from th mrgrs nd cquisitions, frquntly th forcstd bnfits r not obtind. This cn b rsult of ovr optimistic forcst by th bidding mngmnt or simply th fct tht th mrgr for inititd for nothr rson, such s gncy problms. So ths thr tkovr motivs hv diffrnt outcom on th wlth crtd ftr mrgrs nd cquisitions. If synrgy is th primrily motiv for th mrgr, thn th trgt's nd biddr's shrholdrs should gin nd th distribution of wlth should only dpnd on th brgining powr of th biddr nd th trgt. If th scond motiv tks plc nd it mns tht gncy problm is worsning, th min slf-intrst of th biddr's mngmnt is th prim rson for th mrgr or cquisition. In such cs, mngrs just focus on growth rthr thn on th shrholdrs' vlu. For xmpl, Conyon nd Murphy (2002) show tht for th UK, siz (nd not th prfomnc) is th min dtrminnt of th mngril slris. This fct cn xplin why mngrs r so tmptd to us fr csh flow to furthr build th mpir tht hopfully will rsult in highr slris nd bonuss. No wondr tht ftr such circumstncs, th totl vlu ftr mrgrs nd cquisitions ctully gos down. Mngrs who r ggrvtd by prsonl intrsts, (.g. mximiz th siz of th firm nd thir fild of control) r mor pron to sk out lrg, wll known compnis s cquisition trgts - nd usully ovrpy in th bidding procss. This is n doubtful motiv for th cquisition of rltivly smll nd unknown privt compnis. Th cquisition of privt compny mor sily fits th motiv of mximiztion of shrholdr wlth. nd th third motiv of M& cn b th mngmnt hubris. Hubris is spcilly prvlnt ftr good priods whn th firm hs bn doing wll nd futur prospcts r good nd mngmnt is ovrconfidnt. Svrl rsrch pprs stt tht vn th mthod of pymnt my influnc biddr gins/losss from cquisitions. In gnrl, th vidnc indicts tht pymnt in shrs is lss likly to gnrt biddr gins thn pymnt in csh. Howvr, it dos not hold tru whn th trgt is privt firm. Drpr & Pudyl (2005) hv 2 hypothss. First on includs corport monitoring, whr th shrs pid to cquir privt compny r likly to b concntrtd in th hnds of fw (privt firm ownrs), but th shrs pid to cquir listd compny r widly disprsd. Thus, th wll-bing of th privt compny ownrs will b strongly ssocitd with th qulity of biddr. Thy r thrfor forcd to cquir informtion on th biddr nd to obsrv prformnc ftrwrds in ordr to rduc gncy costs for ll shrholdrs. Scond hypothsis ntils symmtric informtion. This is connctd to th first hypothsis. Th issu of shrs by public compnis is frquntly intrprtd s "bd nws" du to symmtric informtion. For privt firms bing tkn ovr, howvr, th prospct of tking lrg block of shrs is strong incntiv for thm to closly scrutiniz th ffirs of th biddr, thus rducing informtion symmtry. ccptnc of th bid rflcts willingnss to ti thir futur to th futur of th bidding firm, nd thrfor snds positiv signl to th mrkt (Hirshlifr, 2002). Mrgrs nd cquisitions my ld to ly-offs in th short-trm, yt is myb 'job-rscud' from bnkruptcy, nd th firm my grow or crt nw job in ffilitd businsss in th longr trm. Th ngtiv ffct of M& cn b bsd lso on th dcrsing spnding on R&D. vluting ll ffcts tht M& inflict; on should not ignor th consquncs tht M& hv on th tchnologicl ctivitis. ll in ll, most mpiricl studis show tht cquisitions hv ngtiv impct on th post-cquisition R&D input nd output of cquiring firms. From nothr stndpoint just ftr th M& som projcts tht wr not possibl du to finncil limittions bfor, bcom fsibl ftr M& bcus of th fusion of knowldg nd vilbl tchnology, which diminishd th oprtionl cost cross R&D projcts nd stimultd invsting into R&D. M& thrfor ffct R&D through th spciliztion of R&D tsks nd synrgis bcom vilbl ftr rsourcs shring tht rsult in brodn rng or R&D. Through M& compnis cn incrs mrkt powr nd crt brrirs to ntry in tchnology but t th sm tim incrsd mrkt powr cn ld to lss imptus to innovt. ccording to rcnt study by Th Boston Consulting Group, compnis voiding mrgrs nd cquisitions in th currnt conomic nvironmnt my b missing strtgic opportunity.Th study nlyzd 277 M& trnsctions occurring in th Unitd Stts btwn 1985 nd 2000 nd concludd tht whil most mrgrs (64%) dstroy vlu, mrgrs tking plc during priods of blow-vrg conomic growth hv highr liklihood of succss.vn mor importnt, ths wk-conomy mrgrs gnrt considrbly mor shrholdr vlu, on vrg, thn dls tking plc during priods of bov-vrg growth. From conomic stndpoint, th vrg prformnc of thos wk-conomy mrgrs ws noticbly bttr comprd to th strong-conomy dls.Whrs th strong-conomy dls in th study smpl dstroyd vlu, on vrg, th wk-conomy dls crtd vlu.ftr two yrs, th rltiv totl shrholdr rturn (RTSR) of th wk-conomy dls ws 14.5 prcntg points grtr thn tht of th strong-conomy mrgrs nd 8.3 prcntg points grtr thn th rturns of th mrkt s whol (Jffry Kotzn nd Chris Nnn) Vry oftn mrgrs nd cquisitions fil bcus not ll informtion bout th dl is proprly communictd to ll stkholdrs. Of cours, it is tdious procss to rssur tht th mssg rchs ll constituncis, but in ordr to sty succssful ftr M& th right communiction strtgy should b chosn. It is not n sy tsk to shift th mindst of mploys, but it is bsolutly ncssry to mk thm fl prt of it. To sum up vrything tht ws mntiond bov I cn just conclud tht succss of M& dpnds mor on post cquisition strtgis tht mk th rl diffrnc in vlu crtion or dstruction. nd th point hr to b concludd is tht it is not wht you buy but how you mng th cquird compny is ky fctor in distinguishing filur from succss. Bibliogrphy: 1. ndrd, G., Mitchll, M. nd Stfford, . (2001). Nw vidnc nd Prspctivs on Mrgrs. Journl of conomic Prspctivs, 15(2): 103-120. 2. grwl, ., Jff, J.J. nd Mndlkr, G.N. (1992). Th Post-Mrgr Prformnc of cquiring Firms: R-xmintion of n nomly, Journl of Finncil conomics, 47 (4): 1605-1621. 3. Bchr, D.. (2000). Th Vlution ffct of Bnk Mrgrs. Journl of Corport Finnc, 6: 189-214. 4. Frnks, J.R. nd Hrris, R.S. (1989). Shrholdr Wlth ffcts of Corport Tkovrs: Th UK xprinc 1955-1985. Journl of Finncil conomics, 23(1): 225-249. 5. Frnks, J.R., Hrris, R.S. nd Titmn, S. (1991). Th Postmrgr Shr-Pric Prformnc of cquiring Firms. Journl of Finncil conomics, 29: 80-96.. 6. Grgory, . (1997). n xmintion of th Long Run Prformnc of UK cquiring Firms. Journl of Businss Finnc nd ccounting, 24 (7&8): 971-1002. 7. Iknbrry, D., Lkonishok, J. nd Vrmln, T. (1995). Mrkt Undrrction to Opn Mrkt Shr Rpurchss. Journl of Finncil conomics, 39: 181-208. 8. Jnsn, M.C. nd Rubck, R.S. (1983). Th Mrkt for Corport Control: Th Scintific vidnc. Journl of Finncil conomics, 11: 5-50. 9. Knndy, V.. nd Limmck, R.J. (1996). Tkovr ctivity, CO Turnovr, nd th Mrkt for Corport Control. Journl of Businss Finnc nd ccounting, 23(2): 267-285. 10. Kohrs, N. nd Kohrs, J. (2000). Th Vlu Crtion Potntil of High-Tch Mrgrs. Finncil nlysts Journl, 56(3): 40-51. 11. Lodrr, C. nd Mrtin, K. (1992). Post cquisition Prformnc of cquiring Firms. Finncil Mngmnt, 21(3): 69-79. 12. Loughrn, T. nd Vijh, .M. (1997). Do Long-trm Shrholdrs Bnfit from Corport cquisitions Th Journl of Finnc, 52(5): 1765-1790. 13. Mulhrin, J.H. nd Boon, .L. (2000). Compring cquisitions nd Divstiturs. Journl of Corport Finnc, 6: 117-139. 14. Ru, P.R. nd Vrmln, T. (1998). Glmour, Vlu nd th Post-cquisition Prformnc of cquiring Firms. Journl of Finncil conomics, 49: 223-253. Read More