The purpose of a company’s growth by merger and acquisition (M&A), rather than organic growth, is manifold. Common theories suggest the main reasons to be for instance greater market share or managers’ interest for status and power. However, empirical studies show that most business combinations fail to create shareholder value. What encourages companies,like Pfizer or Google, to invest billions of Dollars in M&A, when empirical results are so discouraging?
This essay gives a brief introduction on the terminology of M&A, followed by seven core objectives (market power, economies of scale, synergy effects, diversification, the incorporation of transaction costs, value discrepancy and managerial utility), and finally examines the extent to which these objectives are achieved in practice.
Table of contents
1. Introduction
2. M&A fundamentals
3. Motives for M&A
3.1 Market power
3.2 Economies of scale
3.3 Synergy effects
3.4 Diversification
3.5 Incorporate transaction cost
3.6 Value discrepancy
3.7 Managerial utility
4. Application to business environment
4.1 Google’s acquisition of Motorola
4.2 Pfizer’s acquisition of Allergan
5. Conclusion
Research Objectives and Themes
This essay aims to explore the theoretical motives behind mergers and acquisitions (M&A) and evaluate the extent to which these objectives are realized in practice, given the empirical evidence suggesting that many such combinations fail to create shareholder value.
- Theoretical terminology and classifications of M&A transactions.
- Core motives including market power, economies of scale, synergy, and diversification.
- Behavioral and economic factors such as managerial utility and transaction cost management.
- Practical case study analysis of major corporate acquisitions.
- Evaluation of the success rates and long-term profitability of M&A activities.
Excerpt from the Book
3.1 Market power
The basic assumption behind horizontal M&A is that a reduced number of competitors will increase the market power, and increase the prices in the particular market (Perry and Porter, 1985). This type of M&A is especially favourable in saturated markets, as internal growth would cause excess in supply and therefore lower the prices. However, in a perfectly competitive market with a large number of sellers, a few M&A deals will hardly affect the pricing power. Generally, it is possible to oligopolistic firms to increase their pricing power through M&A, which is however strictly monitored by local competition and market authorities (CMA) (Gort, 1969).
Studies show that gaining market power is a primary reason for M&A (Brouthers et al, 1998). However, the S-S-R model (Salant et al, 1983) reveals that a merger in a Cournot-oligopoly is generally unprofitable (πcollusive below πnon-collusive), as illustrated in figures 2a and b.
Summary of Chapters
1. Introduction: Provides an overview of the purpose of M&A growth and poses the central question of why firms invest in acquisitions despite empirical evidence of frequent failure.
2. M&A fundamentals: Defines the legal and operational types of M&A and highlights the cyclical, wave-like nature of M&A activity in the economy.
3. Motives for M&A: Examines seven distinct drivers, ranging from classical economic goals like market power and synergies to behavioral factors like managerial utility.
4. Application to business environment: Demonstrates the theoretical concepts through the real-world examples of Google’s acquisition of Motorola and Pfizer’s acquisition of Allergan.
5. Conclusion: Summarizes that while M&A offers specific benefits like resource access, the majority of deals fail to achieve their objectives, and calls for more nuanced future research.
Keywords
Mergers and Acquisitions, M&A, Market Power, Economies of Scale, Synergy Effects, Diversification, Transaction Costs, Managerial Utility, Corporate Growth, Shareholder Value, Business Strategy, Cournot-oligopoly, Asset Stripping, Tax Inversion, Corporate Finance
Frequently Asked Questions
What is the primary focus of this research?
The essay investigates the discrepancy between the theoretical rationales for mergers and acquisitions and their often poor empirical performance regarding shareholder value creation.
Which key motives for M&A are analyzed?
The analysis covers market power, economies of scale, synergy effects, diversification, transaction costs, value discrepancy, and managerial utility.
What is the central research question of this study?
The study examines why firms continue to spend billions on M&A despite empirical evidence suggesting that most business combinations fail to create value for shareholders.
Which scientific methodology is applied here?
The paper utilizes a literature-based theoretical review of classical economic models, such as the S-S-R model, combined with an applied analysis of contemporary corporate case studies.
What topics are discussed in the main section?
The main section details the economic and behavioral drivers of M&A and tests these against real-world applications in the technology and healthcare sectors.
Which keywords best describe the content?
Key terms include M&A, market power, synergy, shareholder value, transaction costs, diversification, and managerial utility.
How does the author explain the "empire-building theory"?
The theory suggests that managers pursue M&A primarily to enhance their own power, status, and job security rather than to maximize long-term shareholder wealth.
What significance do M&A "waves" have in this study?
M&A waves are discussed in relation to Gort’s disturbance theory, suggesting that economic volatility and changing expectations influence the frequency and timing of acquisitions.
- Arbeit zitieren
- Anonym (Autor:in), 2015, Underlying objectives of merger and acquisition. What are the objectives underlying M&A and to what extent are these achieved?, München, GRIN Verlag, https://www.grin.com/document/358856
