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 alternative
to growth by internal or organic capital investments. (Sudarsanam,(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. (DePamphilis,
(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)
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 exactly
that.
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 paper aims to collect the most important research that has been done on the topic of M & A motive, structure it and emphasize crucial findings.
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.
Table of Contents
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
Objective and Research Focus
The objective of this thesis is to provide a structured overview of the various types and objectives of Mergers and Acquisitions (M & A) transactions, while analyzing the different motives that lead companies to engage in such activities, using shareholder value as a primary framework for evaluation.
- Theoretical exploration of M & A definitions, types, and historical context.
- Categorization of transaction motives based on their impact on shareholder value (positive, negative, and uncertain).
- Identification of critical success factors for M & A transactions.
- Analysis of strategic, organizational, and ethical challenges in corporate acquisitions.
- Examination of how managerial behavior affects acquisition outcomes.
Excerpt from the Book
3.2.1.1 Synergy
Searching for synergy is a crucial part of every phase of M & A activity, from translating strategy to objectives, to searching for a target, planning and integration. (Marks and Mirvis, (2010) p. 10) Generally, the expected synergy effects determine the price a company is willing to pay for an acquisition. Without considering these effects, an acquirer will normally not be willing to pay the price expected by the management of the company to be acquired. (Kummer, Eiffe, Mölzer, (2011) p. 31)
There are various types of possible synergies. According to Kummer, Eiffe, Mölzer ((2011) p. 32), cost-, collusive- and financial synergy are three crucial examples of synergies.
• Cost Synergy
Cost synergies are typically a result of cost optimization through integration. In order to correctly evaluate possible cost synergies, companies should try to quantify them and determine how likely they are going to take place. Cost synergies can be created in various parts of a business, such as administration, purchasing, logistics, information technology (IT), production and others. (Kummer, Eiffe, Mölzer, (2011) p. 33-34)
• Collusive Synergy
Collusive synergy refers to the gathering of scarce resources in order to increase market power and turnover and minimize risks at the same time. The value that collusive synergy generates for a company is potentially higher than the value yielded by cost- or financial synergy. (Chatterjee, (1986) p. 121)
• Financial Synergy
Financial synergy is the effect that is achieved when two formerly unrelated companies combine their capital. This combination will typically lead to a reduction in the cost of capital and a higher cash flow. (Chatterjee, (1986) p. 121) Another source of financial synergy are the potential savings of taxes on investment income and other tax benefits depending on the jurisdiction in which the transaction takes place. (Kummer, Eiffe, Mölzer, (2011) p. 35) Some scholars claim that financial synergy is so important, under certain circumstances, without it there would be no advantage from a merger at all. (Fluck and Lynch, (1998) p. 22)
Summary of Chapters
1 Introduction: Defines the problem statement regarding high failure rates in M & A activities and outlines the objective and methodological approach of the thesis.
2 Mergers and Acquisitions: Provides a historical overview, defines fundamental terms, distinguishes between various types (horizontal, vertical, conglomerate), and identifies objectives.
3 Motives for Engaging in M & A Activity: Discusses the planning process and categorizes motives into those that increase, decrease, or have an uncertain impact on shareholder value.
4 Summary and How to Make M & A Transactions Successful: Concludes the thesis by offering insights into success factors such as strategic fit, due diligence, and ethical considerations.
Keywords
Mergers and Acquisitions, M & A, Shareholder Value, Synergy, Corporate Restructuring, Strategic Fit, Organizational Fit, Managerial Hubris, Agency Problems, Free Cash Flow Theory, Diversification, Due Diligence, Market Power, Managerial Efficiency, Business Strategy
Frequently Asked Questions
What is the core focus of this thesis?
The work focuses on the motives behind Mergers and Acquisitions (M & A) and how these activities influence the shareholder value of the involved companies.
What are the primary themes discussed in the paper?
The key themes include the definition and history of M & A, the classification of transaction types, the analysis of motives influencing shareholder value, and factors determining transaction success.
What is the main research goal?
The goal is to provide a structured overview of M & A types and objectives while identifying the motives that lead companies to initiate these transactions, evaluated through the lens of shareholder value.
Which scientific method is employed?
The thesis is based on extensive literature study and academic research rather than empirical data collection.
What does the main body cover?
The main body examines the planning processes of M & A, distinguishes motives by their effect on shareholder value (positive, negative, uncertain), and details specific concepts like synergy and hubris.
Which keywords characterize the work?
Key terms include M & A, Shareholder Value, Synergy, Corporate Restructuring, Strategic Fit, and Managerial Hubris.
How does the author define managerial hubris?
It is defined as a misconception where managers overestimate their own skills and talents, leading them to believe they can achieve gains from an acquisition when the circumstances do not support such an outcome.
What is the "Free Cash Flow Theory" in the context of M & A?
It suggests that managers might use excess free cash flow to invest in mergers with negative net present values to build corporate empires, primarily for personal gain rather than shareholder wealth.
Why is "due diligence" emphasized for success?
Proper due diligence is crucial to avoid "managerial hubris" and the payment of excessive premiums; it involves a thorough analysis of the target's financial condition, assets, and management.
What is the distinction between horizontal and vertical mergers?
Horizontal mergers involve the combination of two businesses (often competitors), while vertical mergers connect companies through a buyer-seller relationship, such as a company acquiring its supplier or distributor.
- Quote paper
- Markus Hoffmann (Author), 2013, Mergers and Acquisitions Motive, Munich, GRIN Verlag, https://www.grin.com/document/210976
