Mergers And Acquisitions
M&A activity has been around since the end of the nineteenth century and empirical evidence shows that most mergers fail to achieve their merger objectives.
Mergers and Acquisitions (M&A) activity is defined as the “aspect of corporate strategy, finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow without having to create another business entity”. This definition highlights two factors about M&A activity which are;
M&A is a strategic tool used to accelerate growth in market share or product volume.
M&A involves the amalgamation of two or more firms to form one entity leading to two previously autonomous firms operating as a single unit.
M&A can destroy shareholder value as evidenced by failure of most M&A activity in achieving merger objectives. Sudi Sudarsanam argued that firms “must always consider the alternatives to acquisitions as a means of achieving its strategic objectives” because the risks associated with M&A are enormous.
Stock markets appear to support this argument as the stock price of the acquiring firm usually decline on announcing the news of intending to acquire another firm. This reinforces the view by Straub, (2007) and King et al, (2007) that mergers often fail to add significant shareholder value of the acquiring firm’s shares.
M&A activity is driven by a plethora of factors for example firms accelerating growth using acquisitive strategies, firms aiming to achieve aggressive sales growth as was the case with Vodafone in the late 1990s. M&A is also a strategic tool used by some firms to enter new markets. Some firms employ it to achieve cost efficiencies, economies of scale and diversification. Other M&A deals have been driven by financial engineering and availability of cheap money which led to increased to their demand.
Recent M&A activity has been largely driven by factors such as low interest rates, economic booms, technological advancement, availability of cheap finance and the need to eliminate arbitrage opportunities. M&A activity could be one of the variables why stock markets had been at record levels during the past decade.
Mary M Bange and Michael A Mazzeo (1990) argued that there are “usually two types of takeover strategies” namely:
A negotiated merger: the bidder negotiates the offer with the target firm’s management.
• An unsolicited tender: the bidder makes a direct offer to the target firm's shareholders. This bypasses the target firm’s management.
TYPES OF M&As:
Horizontal mergers involve the “marriage” between companies that produce similar products, for example the BP and Amoco merger.
Vertical mergers occur where the two merging firms are part of the same value chain but are at different levels, for instance a manufacturer merging with a supplier.
Conglomerate mergers involve firms in different industries merging, for example a tobacco company amalgamating with a car manufacturing company.
Mergers and Acquisitions (M&A) activity is defined as the “aspect of corporate strategy, finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow without having to create another business entity”. This definition highlights two factors about M&A activity which are;
M&A is a strategic tool used to accelerate growth in market share or product volume.
M&A involves the amalgamation of two or more firms to form one entity leading to two previously autonomous firms operating as a single unit.
M&A can destroy shareholder value as evidenced by failure of most M&A activity in achieving merger objectives. Sudi Sudarsanam argued that firms “must always consider the alternatives to acquisitions as a means of achieving its strategic objectives” because the risks associated with M&A are enormous.
Stock markets appear to support this argument as the stock price of the acquiring firm usually decline on announcing the news of intending to acquire another firm. This reinforces the view by Straub, (2007) and King et al, (2007) that mergers often fail to add significant shareholder value of the acquiring firm’s shares.
M&A activity is driven by a plethora of factors for example firms accelerating growth using acquisitive strategies, firms aiming to achieve aggressive sales growth as was the case with Vodafone in the late 1990s. M&A is also a strategic tool used by some firms to enter new markets. Some firms employ it to achieve cost efficiencies, economies of scale and diversification. Other M&A deals have been driven by financial engineering and availability of cheap money which led to increased to their demand.
Recent M&A activity has been largely driven by factors such as low interest rates, economic booms, technological advancement, availability of cheap finance and the need to eliminate arbitrage opportunities. M&A activity could be one of the variables why stock markets had been at record levels during the past decade.
Mary M Bange and Michael A Mazzeo (1990) argued that there are “usually two types of takeover strategies” namely:
A negotiated merger: the bidder negotiates the offer with the target firm’s management.
• An unsolicited tender: the bidder makes a direct offer to the target firm's shareholders. This bypasses the target firm’s management.
TYPES OF M&As:
Horizontal mergers involve the “marriage” between companies that produce similar products, for example the BP and Amoco merger.
Vertical mergers occur where the two merging firms are part of the same value chain but are at different levels, for instance a manufacturer merging with a supplier.
Conglomerate mergers involve firms in different industries merging, for example a tobacco company amalgamating with a car manufacturing company.
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