Today, companies need to constantly expand their business to stay ahead of the severe
competition. As competition grows more intense, it makes sense to join forces or simply
acquire the rival to provide the most diverse service and to reach even the last customer.
But is it really only about the need for efficiency to merge and acquire competitors? Are
managers and investors right about their hope, that every new acquisition or merger offers
more control over the market? Or are they themselves pushed into these promising expectations?
This research focuses on how social behavior influences value creation in mergers and
acquisitions. Throughout history, waves have been observed that reflect the excessive hype
for perennial need of growth. Growth by acquisitions and mergers is seen as key element to
create value by investors and managers. However, reality looks different. This research
focuses on a two step approach by first describing underlying social catalysts that amplify
the trend towards value creation in mergers and acquisitions. Secondly, to verify the investigation
of social behavior, the results are matched to a financial approach to detect whether
the transaction price justifies the current value and possible synergies or whether value
is destroyed.
A case study was conducted of Boss Media AB, a software company situated in the online
gaming industry, which experienced several mergers and acquisitions since their foundations
and was eventually acquired itself. The company provided an interview and further
information on their involvement with mergers and acquisitions.
The research showed that mergers and acquisitions continue to increase in number and
value, leading to the amplitude of each wave being higher than the previous one. This also
means that more value is destroyed. It is illustrated that managers being determined to have
bet on the right horse, are often more influenced by social behavior and trends than they
think they are. Blinded by the overestimation of their own abilities, and prosperous shortterm
profits, managers overvalue their investment choices. Hence, the research implies that
managers destroy shareholder value even though they initially intended to create it.
Table of Contents
1. Introduction
1.1. Background
1.2. Problem discussion
1.3. Research question
1.4. Purpose
1.5. Delimitation
2. Theoretical Framework
2.1. Theory on Mergers & Acquisitions
2.1.1. Mergers
2.1.2. Acquisitions
2.2. Trends in Mergers & Acquisitions
2.2.1. Mergers & Acquisitions as a Trend in history
2.2.2. Behavioral Catalysts in Mergers & Acquisitions
2.3. Value creation in Mergers & Acquisitions
2.3.1. The discounted cash flow model
3. Methodology
3.1. Research design
3.1.1. Sample
3.2. Data collection
3.2.1. Realization
3.2.2. Operationalization
3.3. Research quality
3.3.1. Validity
3.3.2. Reliability
3.3.3. Source criticism
4. Empirical investigation
4.1. The Case Study – Boss Media AB
4.1.1. Industry background - the online gaming industry
4.1.2. Company background - Boss Media AB
4.2. Revelations from the empirical data
4.2.1. Revelations from the interviews and statistical ascertainment
5. Analysis
5.1. Mergers & Acquisitions - a trend caused by social behavior?
5.2. Mergers & Acquisitions – sustainable value creation?
5.2.1. Evaluating Boss Media AB - the discounted cash flow model
5.2.2. Results from the evaluation of Boss Media AB
6. Conclusion
6.1. Summary of the results
6.2. Limitations
7. Reflections
7.1. Reflections of Mergers & Acquisitions as trigger for trends and value creation
7.2. Suggestions for future research
Objectives and Research Themes
This thesis examines the field of Mergers and Acquisitions (M&A), specifically investigating whether they are a strategic tool for sustainable value creation or a phenomenon driven by social behavioral patterns and cyclical trends. The core research aim is to determine if managerial overconfidence (hubris), organizational power display (managerialism), and imitative behavior (herding) act as catalysts for M&A waves that ultimately destroy rather than create shareholder value.
- The relationship between historical M&A waves and global economic conditions.
- The influence of social and behavioral catalysts on corporate decision-making in M&A.
- The application of the Discounted Cash Flow (DCF) model as a tool to assess the intrinsic value of M&A investments.
- A detailed case study of Boss Media AB to analyze the impact of acquisition strategies within the online gaming industry.
- Evaluation of whether corporate acquisition premiums are reflective of true value creation or overvaluation.
Excerpt from the Book
Hubris
The selfish behavior of management and its impacts on acquisitions has been assessed by Roll (1986). Roll (1986) claims that overpriced premiums paid in an acquisition process result from the overestimation of increase in value. He argues that value does not accumulate in M&As due to hubris. This overestimation is triggered by the management’s arrogance and belief that they are entitled to make the best decisions and therefore destroy value (Seth, Son, & Pettit, 2000). Roll (1986), who was the first to classify management’s behavior in the context of M&A activities, refers to it as hubris.
Markets and management are expected to behave rational and thrive for their equilibrium (Peters, 2005). Rational decision making provided, acquisitions are supposed to result in an increase of value for the buyer (Roll, 1986). However, an imbalanced market reflects upon the irrational behavior of management and does not add value to an M&A investment (Hayward & Hambrick, 1997). An example of overvaluation is the occurrence of bidding wars in acquisition, resulting in prices beyond realistic dimensions (Borghese & Borgese, 2002). Managers risk being excluded, if they disobey market’s rules (Peters, 2005). Managers infected by hubris will not retreat from the bid unless they face serious personal harms (Roll, 1986). They will not consider the best interest of the company any longer, but thrive for self-fulfillment (Hayward & Hambrick, 1997). Especially retreating from a bid shows weakness and implies the lack of resources to acquire the target (Roll, 1986). Overvalued bids are more likely to be accepted during economic peaks as managers easily overestimate synergetic effects (Rhodes-Kropf & Viswanathan, 2004). They accept internal overpricing as a reason of asymmetrical information, assuming the company is undervalued externally (Malmendier & Tate, 2008).
Summary of Chapters
1. Introduction: Presents the research focus on M&A as a potential fad versus a value-creation tool, establishing the problem discussion and the core research questions.
2. Theoretical Framework: Defines M&A concepts, explores historical trends and cycles, and details behavioral theories like hubris, managerialism, and herding alongside valuation models like DCF.
3. Methodology: Outlines the qualitative case study approach, the selection of Boss Media AB as the research object, and the methods used for data collection and analysis.
4. Empirical investigation: Provides the background of the online gaming industry and Boss Media AB, and presents the empirical findings gathered from interviews and financial reports.
5. Analysis: Interprets the empirical findings using the established theoretical framework to assess if M&A activity is driven by social behavior and whether it results in sustainable value creation.
6. Conclusion: Summarizes the key findings, answering the research questions regarding social catalysts, and addresses the limitations of the study.
7. Reflections: Discusses the practical implications of the findings for practitioners and offers suggestions for future academic research in this field.
Keywords
Mergers and Acquisitions, M&A Waves, Value Creation, Hubris, Managerialism, Herding, Discounted Cash Flow, DCF, Boss Media AB, Online Gaming, Behavioral Catalysts, Overpricing, Shareholder Value, Corporate Strategy, Market Efficiency.
Frequently Asked Questions
What is the core focus of this research?
The research investigates whether Mergers and Acquisitions are driven by rational economic strategies for value creation or if they are primarily motivated by social behavior and recurring market trends.
What are the central themes discussed in this work?
Key themes include the impact of behavioral catalysts such as hubris, managerialism, and herding on M&A activity, alongside the financial evaluation of acquisitions using the Discounted Cash Flow (DCF) model.
What is the primary objective of the study?
The study aims to determine if M&A is a trendy fad that often destroys value or a sustainable method for corporate growth, while questioning if acquisition prices accurately reflect the target's value.
Which scientific methods are employed?
The research utilizes a qualitative case study approach, involving semi-structured interviews with industry participants, as well as a quantitative financial analysis using the Discounted Cash Flow (DCF) model to evaluate the specific case of Boss Media AB.
What does the main body cover?
The main body integrates theoretical perspectives on M&A design and behavior with an empirical investigation of Boss Media AB, followed by an analytical section that evaluates whether the observed acquisition behaviors align with sustainable value creation.
Which keywords characterize this thesis?
The work is defined by terms such as Mergers and Acquisitions, M&A waves, behavioral catalysts (hubris, managerialism, herding), value creation, and financial valuation methods like the DCF model.
Why was Boss Media AB chosen for the case study?
Boss Media AB was selected due to its significant involvement in M&A activities within the rapidly growing and highly competitive online gaming sector, and because it provided the necessary transparency for a detailed case analysis.
What role does the financial crisis of 2008 play in this study?
The 2008 financial crisis serves as a contextual backdrop to analyze how GTECH Corporation utilized economic instability to acquire companies, providing a practical example of how power display and managerial behavior influence M&A decisions.
- Quote paper
- Anna Lena Bischoff (Author), Linn Sällström (Author), Jesco A. Danylow (Author), 2011, Mergers & Acquisitions, Munich, GRIN Verlag, https://www.grin.com/document/173333
