Benefits of M&A
Mergers and acquisitions (M&A) can bring several benefits to companies, including increased market share, access to new technologies or markets, and potential cost savings through economies of scale. M&A can also lead to enhanced competitiveness and improved financial performance, as well as opportunities for diversification and expansion into new business areas.
8 Key excerpts on "Benefits of M&A"
eBook - ePubUnderstanding Mergers and Acquisitions in the 21st Century
A Multidisciplinary Approach
- K. McCarthy, W. Dolfsma(Authors)
- 2012(Publication Date)
- Palgrave Macmillan(Publisher)
...1 Introduction Understanding Mergers and Acquisitions in the 21st Century: A Multidisciplinary Approach Killian J. McCarthy and Wilfred Dolfsma 1. Introduction Mergers and acquisitions (M&As) are big business. Some 289,254 M&A deals were announced and completed in the first ten years of the 21st century, at a combined cost of $18,721,100,000,000 (or $18.72 trillion). At its height, “the value of M&A averaged $10 billion a day” (The Economist, 8 April 2006). And so large was the expenditure that, at 2010 levels, more than three times the annual gross domestic product (GDP) of China – the world’s shining beacon of economic growth – was spent on mergers, acquisitions and corporate restructurings. A merger is thought to create: – cost synergies, as labour forces are reduced, and administration and production costs are streamlined (Carey, 2000); – market power gains, as a reduction in the level of competition allows for wealth to be transferred from the firms customers and suppliers to its shareholders (Chatterjee, 1986) – financial gains, as a merger produces a company with a reduced tax profile (Devos et al., 2008); and – scale and scope economies, as firm exploits the opportunity to expand and diversify into new products and regions (Besanko et al., 2006). Together these are referred to as ‘synergies’. And because synergistic savings – and thus the creation of value – are amongst the most commonly cited reasons for merger activity (Gaughan, 2010), an increasing number of mergers and acquisitions, one would imagine, is to be welcomed. But positive as this may at first appear, the fact that the impact of M&A activity on the performance of a firm is thought to be, at best, “inconclusive” (Roll, 1988; Haspeslagh & Jemison, 1991; Sirower, 1997), and at worst “systematic[ally] detrimental” (Dickerson et al., 1997), is troubling...
eBook - ePubCorporate Finance
A Practical Approach
- Michelle R. Clayman, Martin S. Fridson, George H. Troughton(Authors)
- 2012(Publication Date)
- Wiley(Publisher)
...For a company, liquidation is typically associated with bankruptcy. 10. SUMMARY Mergers and acquisitions are complex transactions. The process often involves not only the acquiring and target companies but also a variety of other stakeholders, including securities antitrust regulatory agencies. To fully evaluate a merger, analysts must ask two fundamental questions: First, will the transaction create value; and second, does the acquisition price outweigh the potential benefit? This chapter has made the following important points. An acquisition is the purchase of some portion of one company by another. A merger represents the absorption of one company by another such that only one entity survives following the transaction. Mergers can be categorized by the form of integration. In a statutory merger, one company is merged into another; in a subsidiary merger, the target becomes a subsidiary of the acquirer; and in a consolidation, both the acquirer and target become part of a newly formed company. Horizontal mergers occur among peer companies engaged in the same kind of business. Vertical mergers occur among companies along a given value chain. Conglomerates are formed by companies in unrelated businesses. Merger activity has historically occurred in waves. These waves have typically coincided with a strong economy and buoyant stock market activity. Merger activity tends to be concentrated in a few industries, usually those undergoing changes, such as deregulation or technological advancement. The motives for M&A activity include synergy, growth, market power, the acquisition of unique capabilities and resources, diversification, increased earnings, management’s personal incentives, tax considerations, and the possibilities of uncovering hidden value...
- Tim Ellis(Author)
- 2018(Publication Date)
- Routledge(Publisher)
...If they could have, they would have in their existing form. The qualitative business synergies that are often overlooked include: • Enhanced brand profile through promoting technical gravitas and personal reputation • Enhanced thought leadership and innovative ideas • Enhanced professional culture through leading-edge technical expertise; i.e. a business based on leading professionals, not a large multi-disciplinary team of generalists/managers • Mentoring younger staff and rising stars. Risks and opportunities Given the relative scale, the acquirer needs to be prepared to be responsible for the risks and therefore seize the commensurate opportunities. The obvious key opportunities are: • Increased revenue and profit leading to escalating earnings per share. However, the indirect benefits often missed or not exploited are: • Additional management talent • Cultural enhancement • Reverse integrating the acquiree tapping into better practices in client-relationship marketing, staff welfare and the like. Key issues to be considered in the acquisition are: • The age and tenure of partners • Competency of second tier of management • Stage in service life cycle and sustainability of the revenue stream • Nature of the acquisition – asset or share capital purchase • Lower overheads and charge-rates of the acquiree and higher relative profitability • Comparable remuneration recognising tax benefits to partners • Residual liabilities • Stability and sustainability of the goodwill and possible impairment using IFRS. Non-competitive acquisitions In established competitive market places, it is generally a seller’s market. Key listed companies and large privately owned firms are seeking to secure greater market share through M&A. For tax purposes, the partners often pay themselves a nominal salary and distribute dividends to family members, trust accounts or other vehicles...
eBook - ePubMergers & Acquisitions
A Critical Reader
- Annette Risberg, Annette Risberg(Authors)
- 2013(Publication Date)
- Routledge(Publisher)
...The thousands of deals that academics, consultants, and businesspeople lump together as mergers and acquisitions actually represent very different strategic activities. (See the table “M&A Strategies: Distinct Activities Mean Differing Challenges” for a breakdown of large acquisitions from the last three years.) Acquisitions occur for five reasons: to deal with overcapacity through consolidation in mature industries; to roll-up competitors in geographically fragmented industries; to extend into new products or markets; as a substitute for R&D; and to exploit eroding industry boundaries by inventing an industry Despite the massive number of books and articles published about mergers and acquisitions, no one has ever tried to link strategic intent to the implications for integration that result. It stands to reason that executives overseeing each of these activities face different challenges. If you acquire a company because your industry has excess capacity, you have to figure out quickly which plants to close and which people to lay off If, on the other hand, you acquire a company because it is developing a hot technology, your challenge is to hold on to the acquisition's best engineers. These two scenarios require the acquiring company to engage in nearly opposite managerial behaviors. I will turn now to the problems that arise in different types of acquisitions which I will examine using the resources-processes-values framework. Resources refer to tangible and intangible assets, processes deal with activities that turn resources into goods and services, and values underpin decisions employees make and how they make them. (See the sidebar “Some Order in the Chaos” for more on these terms.) SCENARIO 1: THE OVERCAPACITY M&A A great many mergers and acquisitions occur in industries that have substantial overcapacity; these tend to be older, capital-intensive sectors. Overcapacity accounts for 37 percent of the M&A deals in our breakdown...
eBook - ePubExperience and Learning in Corporate Acquisitions
Theoretical Approaches, Research Themes and Implications
- Ilaria Galavotti(Author)
- 2018(Publication Date)
- Palgrave Macmillan(Publisher)
...The concept of synergy may be synthetically formulated as follows: Synergies may derive from a variety of sources, including market power, revenue increase, cost efficiency (scale, scope, and learning economies), and resource redeployment (McSweeney and Happonen 2012). 3.2.1 Sources of Synergy 3.2.1.1 Market Power Benefits deriving from market power were first explored in the finance literature to assess the extent to which the reduced competition deriving from industry concentration following an acquisition increases the firm’s pricing power. Although evidence of market power as an antecedent of acquisitions is actually limited (e.g., Kim and Singal 1993), market power has been typically considered as a potential synergistic benefit motivating acquisitions. From a theoretical point of view, benefits in terms of market power may be traced by way of resource dependence theory (Sect. 1.2.7), which suggests that, in view of the interdependences in which a firm becomes embedded to obtain those resources that it cannot generate internally, a key influence is exercised by power, through which organizations try to reduce their relative dependence. According to Pfeffer and Salancik (1978), M&A represent a means by which firms attempt to modify the conditions of environmental interdependence and to achieve stability and predictability in their critical exchanges. M&A may therefore be considered as an actualization of the responsive role conferred on managers, which is substantiated in the potential to act in order to adjust to and to shape the environmental constraints. According to resource dependence theory, there are three general types of mergers and acquisitions, that is, vertical, horizontal, and diversification, each directed to the management of a different form of interdependence...
- Sue Cartwright, Cary L. Cooper(Authors)
- 2012(Publication Date)
- Routledge(Publisher)
...Recent upturns in the economy have caused a resurgence in business confidence, and M & A activity has started to pick up once again. In the first six months of 1993, the number of US M & As showed an increase of 30 per cent compared with the same period in the previous year (New York Times, 1993). The value and frequency of cross-border deals has steadily risen between 1991 and 1993, with a marked increase in joint ventures (KPMG, 1994). A recent survey (Cartwright, Cooper and Jordan, in press) of almost 500 senior European managers suggests that the upward trend is likely to continue. The survey found that 50 per cent of managers considered that it was highly likely that they would make acquisitions within the next three years. Forty per cent indicated that they expected to become involved in a joint venture/strategic alliance, while 10 per cent expected to merge, within the same period. Therefore, there are powerful indicators to suggest that M & A activity is likely to continue to be an important feature of organizational life throughout the 1990s. As, historically, mergers and acquisitions have been considered exclusively the domain of economists, market strategists and financial advisers, the financial and strategic aspects of the activity are well appreciated and have been extensively addressed and debated in the management literature. In contrast, although mergers and acquisitions are something which happens to people in organizations rather than to organizations in any abstract sense, the human aspects of the phenomenon have received relatively little attention. Indeed, ‘people’ are largely ignored or dismissed as being a soft or mushy issue by those who initiate or guide the merger decision...
eBook - ePubThe Professional's Guide to Fair Value
The Future of Financial Reporting
- James P. Catty(Author)
- 2012(Publication Date)
- Wiley(Publisher)
...For example, the management of ABC Corporation is more efficient than that of XYZ, Inc. If, after merging, XYZ is brought up to the efficiency of ABC, the overall returns will improve, unless of course a too-high premium over book value was paid. This type of transaction should result in social as well as shareholder gains. Entities operating similar businesses are most likely to succeed in this situation, as they are able to detect below-average performance and have the expertise to improve it. Operating Synergies Horizontal mergers between competitors may result in economies of scale or better utilization of capacity. Complementary capabilities, such as overlapping distribution systems or common suppliers and customers, can lead to improvements in efficiencies beyond those available through internal expansion. Provided it does not infringe antitrust laws, which vary greatly between nations, vertical integration (combining firms at different levels of an industry) may also result in beneficial coordination of operations and hence additional profits. Financial Engineering A merger combining two or more similar organizations in different parts of the country may result in a lower cost of capital, making both debt and equity funds cheaper. This would be mainly due to lower risks for a larger firm. If the various cash flows are independent, with one making up for a slack period in its counterpart, the possibility of failure is lowered and the cost of debt may be reduced even further. In late 2011, interest rates in most countries are low; therefore a related benefit is that the return on a cash purchase will normally exceed that of money in the bank, which earns about 1% interest, by at least five percentage points. Undervaluation Many mergers are stimulated by a build-or-buy choice for the acquirer...
eBook - ePubThe Corporation
Growth, Diversification and Mergers
- Dennis Mueller(Author)
- 2020(Publication Date)
- Routledge(Publisher)
...9 The effects of mergers Three sets of consequences of mergers interest economists. (1) They can affect the performance of the merging firms — their profits, growth rates, and so on. These effects are of obvious interest to the owners, managers, and employees of the firm, and can help us evaluate the weight to be given to the various hypotheses about the determinants of mergers discussed in the previous chapter. (2) They can affect industry and aggregate concentration levels. (3) They can affect social welfare. This latter effect is, to a considerable extent, a product of the first two consequences of mergers. In this chapter we shall focus on the first set of effects of mergers, since these are most directly related to the theory of the firm. We begin with the effects of mergers on the profitability of the merging firms. On profitability Mergers are a form of investment, but they differ in important ways from normal investments in capital equipment. 1 First, they bring to the firm not only plant and equipment, but employees, management teams, customer and supplier relationships, and often new product lines. They do not simply replace that which exists with something similar but newer, as with much of capital equipment purchases, they inevitably add to the firm expanding either its market share, or its vertical structure, or its product line. While a firm might, with great difficulty, expand by 10 percent in a year through the purchase of plant and equipment and the hiring of new employees, it can double its size over night with a large merger or two. Given the magnitude of the change often brought about by mergers, one expects managers to consider these decisions very carefully prior to making them. If managers maximize profits, then they should expect the profits of their company to rise following a merger...
