Excerpt
Content
Figures
Abbreviations
1 Introduction
1.1 Problem Statement
1.2 Objective
1.3 Procedural Method
2 Mergers and Acquisitions
2.1 History of Mergers and Acquisitions
2.2 Definition of Mergers and Acquisitions
2.3 Types of Mergers and Acquisitions
2.4 Objectives of Mergers and Acquisitions
3 Motives for Engaging in M & A Activity
3.1 Planning M & A Activity
3.2 Distinction of M & A Motives by their Effect on Shareholder Value.
3.2.1 Motives that increase Shareholder Value
3.2.1.1 Synergy
3.2.1.2 Economies of Scale or Scope
3.2.1.3 Increased Market Power and Growth
3.2.1.4 Managerial Efficiency
3.2.2 Motives that decrease Shareholder Value
3.2.2.1 Managerial Hubris
3.2.2.2 Agency Problems
3.2.2.3 Free Cash Flow Theory
3.2.3 Motives with uncertain impact on Shareholder Value
4 Summary and How to Make M & A Transactions Successful
References
Figures
Figure 1: Announced Mergers & Acquisitions Worldwide 1985-2012.
Abbreviations
Abbildung in dieser Leseprobe nicht enthalten
1 Introduction
1.1 Problem Statement
Mergers and acquisitions (M & A) are a form of corporate expansion and growth. They are not the only means of growth for a company, but they are an alterna- tive to growth by internal or organic capital investments. (Sudar- sanam, (1995) p. 1) The first decade of the new millennium was an era of global mega-mergers. Several factors like readily available credit, low interest rates, technological change and global competition fueled M & A activity and in 2007, M & A transactions reached a new record dollar volume worldwide. (DePamphi- lis, (2011) p. 13-14)
Mergers and acquisitions are an important means of removing underperforming managers or companies and transferring resources to where they are most needed. (DePamphilis, (2011) p. 124) However, there is considerable evidence that many M & A activities remain unsuccessful. Estimated failure rates are typically between 60 and 80 percent. (Homburg and Bucerius, (2006) p. 347)
1.2 Objective
Due to these high failure rates, it seems unreasonable for a company to engage in an M & A transaction, but still, more and more companies decide to do ex- actly that.
The goal of this paper is to give a structured overview of the different types and objectives of M & A transactions and the motives, which may lead companies to engage in those transactions.
Given the high failure rates of mergers and acquisitions, this topic is one that is of high significance and has been extensively researched in the past. This pa- per aims to collect the most important research that has been done on the topic of M & A motive, structure it and emphasize crucial findings.
1.3 Procedural Method
The first part of this paper introduces the reader to the world of mergers and acquisitions. After defining mergers and acquisitions, a brief overview of the various types and objectives is given. The next part of the paper informs the reader about the different motives, which may lead executives to engage in M & A transactions. Because shareholder value is essential to almost all firms, it is drawn upon as a framework to organize M & A motives in this paper. The last chapter of this paper summarizes the most important points and emphasizes some of the most crucial factors that make M & A transactions successful. This paper relies on literature study and research and is not empirical.
2 Mergers and Acquisitions
2.1 History of Mergers and Acquisitions
Businesses come and go over the years, probably best illustrated by the annual Fortune 500 list, a list of the 500 largest United States (US) corporations. Only 70 firms from the original 1955 list are still on the list in 2011 and about 2000 firms have appeared on the list at some point. Most companies disappear from the list through mergers, acquisitions, bankruptcy or downsizing. The general media uses the term “Corporate Restructuring” to describe actions taken to ex- pand or contract a firms operations or to fundamentally change its structure. (DePamphilis, (2011) p. 4-5)
Like many other phenomena in business, mergers and acquisitions are subject to cyclical changes, so called “M & A waves”. Those waves can be relevant for companies interested in engaging in the M & A market, because knowing the current state of a cycle allows companies to act anti-cyclical, thus potentially reducing costs. (Kummer, Eiffe, Mölzer, (2011), p. 3)
The first M & A wave took place during the time of industrialization in the early 1900s (Kummer, Eiffe, Mölzer, (2011), p. 3), and M & A transactions grew larger over time as shown in Figure 1. The 6th wave, which lasted from 2003 to 2008, lead to a new record volume of 4,063 billion US Dollars (USD) in M & A transac- tions in 2007. This wave was characterized by a very intense globalization of companies as well as by booming international capital markets, which made large cash transactions possible. (Picot, (2008) p. 4)
Abbildung in dieser Leseprobe nicht enthalten
Figure 1: Announced Mergers & Acquisitions Worldwide 1985-2012. Source: http://www.imaa- institute.org/statistics-mergers-acquisitions.html#MergersAcquisitions_Worldwide
But why do those restructurings happen?
According to the current academic opinion, the main goal of mergers and acqui- sitions is to increase a company’s power in the market and to achieve synergy effects. Instead of growing “naturally”, companies tend to look for shortcuts to increase their (shareholder) value – they are pursuing “value capturing” instead of “natural growth”. Theoretically, mergers and acquisitions also allow to create additional value by combining two companies – finance specialists refer to this phenomenon as “1+1=3”. (Krusche, (2010) p. 13-16)
2.2 Definition of Mergers and Acquisitions
A merger is defined as a combination of assets by two previously separate firms into a new single legal entity. (Farschtschian, (2011) p. 32)
There are different forms of mergers. A statutory merger is a restructuring, in which only one company survives and the merged company ceases to exist. The acquiring company assumes all assets and liabilities of the merged com- pany. A subsidiary merger is a consolidation of two companies where the merged company does not go out of existence, but is incorporated into the ac- quiring company as a subsidiary. A merger differs from a consolidation, in which two or more companies join to form a new entity and only the new entity sur- vives. (Gaughan, (2010) p. 12-13)
Another term commonly heard is takeover. This term is more vague. Sometimes it can refer to a friendly acquisition, sometimes to a hostile one. (Gaughan, (2010) p. 13) These two general types of acquisitions need to be distinguished. When the board of directors of the target company agrees to an acquisition, this acquisition would be referred to as a friendly one. The managers of the target firm will typically keep their positions in the newly created entity. In contrast to that, a hostile acquisition (or takeover) is characterized by the acquired com- pany trying to resist acquisition by others. They are undertaken against the will of the target company. (Farschtschian, (2011) p. 35) In the case of a hostile ac- quisition, managers of the acquired entity may lose their jobs after the acquisi- tion. (Schnitzer, (1996) p. 37)
As a matter of fact, the actual number of mergers in mergers and acquisitions is small. Complete acquisitions account for more than 50 % of all M & A activity. Even when mergers are communicated between equal partners, in reality most result in one party dominating the other. As a matter of fact, the number of real, equal mergers is insignificant. (Farschtschian, (2011) p. 35; Peng, (2008) p. 273)
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