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.
At a glance
- Grade: 2.0 (1.0 is the best grade)
- Applies due diligence as a screening tool in M&A transactions
- Discusses Akerlof’s lemon problem in relation to adverse selection
- 29 sources in the bibliography
- 4 figures
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
This work examines how principal-agent theory can illuminate the risks arising from conflicting interests and information asymmetry in mergers and acquisitions. It asks how these problems affect transaction participants and considers approaches to reducing the risk of an unsuccessful transaction.
- Definitions and forms of mergers and acquisitions
- Principal-agent relationships and conflicting interests
- Hidden characteristics, intentions, actions and information
- Adverse selection and moral hazard
- Screening, signaling, monitoring and contractual incentives
Excerpt from the Book
2.2 Definition of principal-agency-theory
As in the introduction implied the principal-agency-theory (PAT) has a huge impact on success of M&A-transactions. Subsequently the PAT is particularized. Thereby the author focusses on the for this assignment relevant information.
The PAT does not only occur in M&A transactions but also in everyday life. Everybody is frequently confronted with this phenomenon. But what exactly is a principal-agency-relationship?
Broadly defined there is a principal-agency relationship „whenever one individual depends on the action of another.“ For this assignment the definition has to be narrowly defined.
The PAT is a cooperation form of two or more subjects with their own interests. Both try to achieve their optimal goals. The objectives of the subjects interact and are in conflict. One of the subjects performs an action to achieve its goals. This action affects on the interests of the other subject. The acting subject is called “agent” and the affected one is called “principal”.
You can say that the subjects act opportunistically. Opportunistically means that the subjects pursue their goals without regard for the goals of the other subject. Often times tricks and perfidies are used in this relationship to maximize the own benefit at the other subject`s expense. Therefor information and knowledge are kept to oneself or even falsified to deceive the counterpart.
The PAT is a method for analyzing problems where one party (the principal) hires another party (the agent) to perform a certain task for her. It investigates the phenomenon of opposed interests and information asymmetry which is quite often the reason for unsuccessful M&A-transactions.
Exemplarily for a Principal-agency-relationship the relationship between lender and borrower or shareholder and CEO can be mentioned. The following figure shows the structure of a principal-agency-relationship.
Chapter Summaries
1 Preamble: Introduces the challenges of mergers and acquisitions and sets out the work’s purpose and approach.
2 Basics: Defines mergers, acquisitions and principal-agent theory, distinguishing transaction types and explaining the roles of principal and agent.
3 The principal-agency-theory in M&A: Applies the theory to an acquisition scenario and examines hidden characteristics, intentions, actions and information.
4 Solution approaches: Discusses measures addressing adverse selection and moral hazard, including signaling, screening, monitoring and incentives.
5 Conclusion: Summarizes the potential contribution and limitations of principal-agent theory in planning mergers and acquisitions.
Keywords
mergers and acquisitions, principal-agent theory, information asymmetry, adverse selection, moral hazard, hidden characteristics, hidden intention, hidden actions, hidden information, due diligence, signaling, screening, monitoring, incentive schemes
Frequently Asked Questions
What is this work about?
It examines mergers and acquisitions through the lens of principal-agent theory, focusing on conflicts of interest and unequal information.
What are the central topics?
The central topics are acquisition relationships, information asymmetry, adverse selection, moral hazard and approaches to managing transaction risks.
What is the main objective?
The work aims to explain how principal-agent problems arise in acquisitions and to consider ways of reducing associated risks.
What scholarly method is used?
The author develops a conceptual analysis based on published literature and applies principal-agent theory to an illustrative acquisition relationship.
What does the main body cover?
It defines the key concepts, examines different forms of hidden information and behavior, and discusses possible remedies.
Which keywords characterize the work?
Principal-agent theory, mergers and acquisitions, information asymmetry, adverse selection, moral hazard and due diligence are among its key terms.
How does the work illustrate an acquisition relationship?
It uses an example in which an acquiring company acts as principal and the company being purchased acts as agent.
How is due diligence connected to principal-agent problems?
Due diligence is presented as a form of screening through which the acquiring party can obtain information about the other party.
Which approaches to moral hazard are discussed?
The work considers monitoring, incentive schemes and bonding through contractual restrictions.
- Quote paper
- Tobias Marsch (Author), 2015, Principal-Agency-Theory in Mergers and Acquisitions, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/302640
