Mergers and acquisition (M&A) are one of the most important topics in the business world. They provide so many news that online newspapers like the New York Times dedicate own sections to them. Some of the largest mergers did cost more than 100 billion US dollars. In consideration of this public interest and these enormous dollar amounts, a lot of research has been conducted to answer a fundamental question: Do mergers really create value?
In order to answer this question, this paper gives an overview of influential research in the wide field of M&A. It is necessary to first provide a theoretical framework to show how a merger be-tween two firms creates synergies. In other words, how can the value of two merged companies be larger than their independent sum? With this framework in mind, it is possible to look at re-sults of academic research on whether mergers create value in practice and the determinants of success and failure. Another interesting topic in the field of M&A is merger waves, periods with abnormally high merger activity. Several of such waves have been observed, but their cause and return are still topic of academic debate.
The remainder of this study is structured as follows. The next section reviews the most important reasons to merge in order to understand the theoretical value-creating potential. The third section discusses whether mergers also create value in practice and who benefits the most. Section four describes how merger success or failure depends on different properties of involved parties and deal characteristics. The fifth section gives a brief summary of the last three big merger waves and depicts how the occurrences of such waves are explained by two competing theories. The last section concludes the study.
Table of Contents
1. Introduction
2. Reasons to merge
2.1. Financial synergies
2.2. Operational synergies
2.3. Management incentives
3. Do mergers create value?
4. Important factors for value creation
4.1. Bidder characteristics
4.2. Target characteristics
4.3. Deal characteristics
5. Merger Waves
6. Conclusion
Objectives & Core Topics
This paper examines the central question of whether mergers and acquisitions (M&A) truly create value by providing an overview of influential academic research. It explores the theoretical frameworks behind synergies, evaluates empirical findings regarding the success and failure of M&A deals, and investigates the driving forces behind merger waves.
- Theoretical foundations of value creation through financial and operational synergies.
- Managerial incentives and their impact on merger success or destruction.
- Key determinants of value creation, including bidder, target, and deal characteristics.
- Economic and behavioral explanations for recurring merger waves.
Excerpt from the Book
2.1. Financial Synergies
Financial synergies are mainly a result of diversification. Although much of the academic literature is very sceptical about diversification as a reason to merge, its effects can include a “lower cost of capital, reduced tax liability, or better efficiency of the internal capital market” (Renneboog & Szilagyi, 2008, p. 798). The following describes each effect and how it creates or destroys value for the stakeholders of a merging firm.
Diversification yields a lower cost of capital, because a diversified company is less likely to go bankrupt. A diversified company generates income from different and uncorrelated sources and is hence less risky. This in turn leads to a higher debt capacity and lower borrowing costs (Berk & DeMarzo, 2007); the company will be more profitable. Simplifying the effect in terms of European options shows that bondholders are, in a sense, holding a short put position, while stockholder hold long call options. Both have a strike price equal to the amount of debt. A risk reduction of the underlying asset, i.e. the firm, clearly benefits bondholders. However, the value of a long call option increases with volatility, or risk. From a shareholder’s perspective, the effect of diversification depends on whether a lower cost of capital can outweigh the decrease in volatility and is, therefore, a partial transfer of shareholder value to creditors.
Tax liabilities decrease since the company is able to offset taxable profits with losses from new divisions. This is, however, not a creation of value. Devos, Kadapakkam and Krishnamurthy (2009) find that it is rather a wealth transfer from the government to the company. They also find the benefits from an increased income tax shield to be so low, in comparison to operating synergies, that they do not consider it an important reason to merge.
Chapter Summaries
1. Introduction: Outlines the significance of M&A in the business world and defines the study’s scope regarding value creation, determinants of success, and merger waves.
2. Reasons to merge: Categorizes the potential value-creating drivers of mergers into financial synergies, operating synergies, and managerial incentives.
3. Do mergers create value?: Discusses the academic debate on whether mergers effectively create value, covering theories like the hubris hypothesis and the winner’s curse.
4. Important factors for value creation: Analyzes how specific characteristics related to bidders, targets, and the deal itself influence the overall outcome of an acquisition.
5. Merger Waves: Reviews historical periods of high merger activity and compares neo-classical versus behavioral explanations for their occurrence.
6. Conclusion: Summarizes the study’s findings, emphasizing that while M&A can create value, success depends heavily on strategic objectives and efficient management.
Keywords
Mergers and Acquisitions, M&A, Value Creation, Financial Synergies, Operating Synergies, Managerial Incentives, Hubris Hypothesis, Winner’s Curse, Corporate Governance, Merger Waves, Bidder Characteristics, Target Characteristics, Information Asymmetry, Stock-Financing, Corporate Control.
Frequently Asked Questions
What is the primary focus of this paper?
The paper provides an academic overview of the M&A landscape, investigating whether such transactions lead to actual value creation or value destruction for shareholders.
What are the main thematic areas covered?
The analysis covers theoretical synergy frameworks, the role of management in decision-making, determinants of acquisition success, and the causes of historical merger waves.
What is the central research question?
The study centers on the fundamental question: Do mergers really create value?
Which research methods are employed?
The author conducts a literature review and synthesis of influential academic research, comparing findings from various financial and economic studies.
What is discussed in the main part of the document?
The main part examines specific types of synergies, the impact of corporate governance on bidder performance, and the economic rationale behind deal characteristics and timing.
Which keywords best characterize this work?
The most relevant keywords include Value Creation, Synergies, Corporate Governance, Merger Waves, and Information Asymmetry.
How does corporate governance influence merger outcomes?
The research suggests that superior corporate governance at the bidding firm can replace inefficient management at the target firm, which significantly contributes to value creation.
What is the difference between neo-classical and behavioral views on merger waves?
Neo-classical theories attribute merger waves to rational reactions to economic or regulatory shocks, whereas behavioral views emphasize stock market misvaluations and managerial sentiment.
Why is cash-financing often considered better than stock-financing?
Stock-financing can signal to the market that a firm's shares are overvalued, often leading to a stock price decline after the announcement, whereas cash-financed deals avoid this negative signal.
- Quote paper
- M.Sc. Matthias Runkel (Author), 2011, Mergers. Value Creation or Destruction?, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/285241
