In times of globalization and increasing competition there are a lot of new big challenges for companies and their chief executive officers (CEO). High cost pressure, new competitors and the desire for a growing shareholder value are the challenges of global competitiveness.
After exhausting all opportunities of internal optimization potentials the only way for many companies to grow or to ensure survival is to merge with other companies. The CEOs of the companies try to manage the growing requirements by extending the business portfolios or even acquiring whole companies. So in 2013 in Germany the number of Mergers & Acquisitions (M&A) was the highest for five years. A study of the Boston Consulting Group says that from 1988 to 2010 more than 26.000 transactions were realized. This figure confirms the high importance of that method.
But are M&A the panpharmacon to handle the changing global markets and to ensure the prospective success of the companies? If you have a detailed look at the results you can recognize that a large number of executed M&A did not satisfy the expectations or even destroy value. The risks are all too frequent just underestimated. Often the failure is due to information asymmetry of the acting partners. This effect is called the principal-agency-problem.
What is the reason for that and why do so many M&A fail? What are the real goals of the participants of such an M&A-process? Do all participants pursue the same objectives or are there maybe any other intentions in the case? The following assignment deals with the M&A-process in relation to the principal-agency-theory and shows some solution approaches to avoid bad surprises for all participating companies after an executed M&A-process.
Table of Contents
1 Preamble
1.1 Introduction and problem
1.2 Procedure and goal
2 Basics
2.1 Definition of Mergers & Acquisitions
2.2 Definition of principal-agency-theory
3 The principal-agency-theory in M&A
3.1 Hidden characteristics
3.2 Hidden intention
3.3 Hidden actions and information
4 Solution approaches
5 Conclusion
Objectives and Topics
The primary objective of this assignment is to analyze the M&A process through the lens of principal-agency theory, identifying why information asymmetry often leads to unsuccessful transactions and proposing strategic solutions to mitigate these risks.
- Information asymmetry in corporate mergers and acquisitions
- The dynamics between principals and agents during M&A processes
- Identification of risks: Hidden characteristics, hidden intentions, and hidden actions
- Mechanisms for risk mitigation including signaling, screening, and incentive schemes
- Strategic recommendations to improve the success rate of M&A transactions
Extract from the Book
3.1 Hidden characteristics
Hidden characteristics are things that one side of a transaction knows about itself that the other side would like to know but does not. The principal can´t value the characteristics and qualities of the agent before the contract is made. The hidden characteristics of the agent can be wanted or unwanted by the principal. The principal is looking for an agent with good skills because the principal´s return depends on the agent´s qualities. Because of the uncertainty about the agent`s skills and his pursuit of utility maximization there is a risk of selecting a bad agent. This is called adverse selection.
In M&A-transactions company A cannot be sure to have all information about the quality of company B before the contract is made. Sometimes the acquiring party experiences bad surprises after an executed transaction. To minimize this risk principals offer an average purchasing price. So the loss is not that big if the quality of the agent is bad. As a consequence the bad-skilled agents will accept the average offer because they feel well-paid and the high-quality agents will not accept the offer because they expect better quotations. In the worst cast that effect can destroy a whole market. This phenomenon was firstly described by George Akerlof in his “Lemon-Problem”.
Summary of Chapters
1 Preamble: Introduces the growing importance of M&A in a globalized market while highlighting that many transactions fail due to information asymmetry and conflicting participant goals.
2 Basics: Defines the fundamental concepts of Mergers & Acquisitions and outlines the theoretical framework of the principal-agency relationship.
3 The principal-agency-theory in M&A: Examines specific types of information asymmetry, such as hidden characteristics, hidden intentions, and hidden actions, within the context of M&A transactions.
4 Solution approaches: Presents various management tools and strategies, including signaling, screening, and monitoring, to minimize the risks associated with information asymmetry.
5 Conclusion: Summarizes the findings and emphasizes that although not all risks can be eliminated, applying principal-agency theory significantly improves the probability of a successful M&A outcome.
Keywords
Mergers & Acquisitions, Principal-Agency Theory, Information Asymmetry, Adverse Selection, Moral Hazard, Signaling, Screening, Due Diligence, Corporate Governance, Shareholder Value, Incentive Schemes, Monitoring, Hidden Characteristics, Hidden Intention, Hidden Action
Frequently Asked Questions
What is the central focus of this paper?
The paper focuses on applying the principal-agency theory to explain and address the high failure rate of Mergers & Acquisitions (M&A) due to information asymmetry between the involved parties.
What are the core thematic areas covered?
The study covers the definition of M&A, the mechanics of the principal-agency relationship, specific manifestations of information asymmetry, and practical solution approaches like signaling and screening.
What is the primary research goal?
The goal is to analyze the M&A process in relation to the principal-agency theory and provide strategic recommendations to avoid negative surprises for participating companies.
Which scientific methods are utilized?
The work employs a theoretical analysis and literature review to connect existing economic theories regarding agency problems with the practical application of M&A transactions.
What is addressed in the main part of the assignment?
The main part details the different varieties of information asymmetry—hidden characteristics, hidden intentions, and hidden actions—and explores various mitigation instruments like incentive schemes and monitoring.
Which keywords characterize the work?
Key terms include M&A, Principal-Agency Theory, Information Asymmetry, Adverse Selection, Moral Hazard, and various strategic tools like Signaling and Screening.
How does "Hidden Characteristics" impact an M&A transaction?
It creates the risk of adverse selection, where the principal may select a low-quality agent because they cannot fully assess the characteristics of the target firm before the contract is finalized.
What is the difference between "Signaling" and "Screening"?
Signaling involves the informed party (the agent) voluntarily providing information to the principal to prove quality, whereas screening involves the principal actively gathering information about the agent through methods like Due Diligence.
- Arbeit zitieren
- Tobias Marsch (Autor:in), 2015, Principal-Agency-Theory in Mergers and Acquisitions, München, GRIN Verlag, https://www.grin.com/document/302640
