Mergers and Acquisitions…

After evaluating FDI last week, I have been introduced to another way in which businesses’ can expand their operations: Mergers and Acquisitions (M&A).  But how does this effect shareholder wealth?

From reading an interesting article on ‘The Economist’, my understanding of why mergers occur has grown.  The article discusses the reason for the decline in some of the biggest electronic companies such as Sony, Panasonic, Fujitsu, etc.  Since 2000 these firms have lost two-thirds of their value, for reasons that they could have controlled, through mergers. One of the main reasons for these vast losses is down to the type of market they are in. With many of these companies making more or less the same product, The Economist highlights, 

The overlap is inefficient: it duplicates research and development, reduces economies of scale and destroys pricing power.  This practice clearly wastes huge amounts of capital, which leads to less competitive power.  This has been seen by the likes of Samsung and Apple who are currently more innovative.  However, why haven’t any of these companies merged with any others? Surely, it could cut their losses and therefore restore shareholder wealth.

With the Car market being highly competitive Peugeot and Citroën have seen that in order to better their competition, they decided to merge and become PSA Peugeot-Citroën. Not only has this merger been successful, Fiat have now commented about getting involved, due to competition from the powerful car giant Volkswagen who have 23.3% of Europe’s market share.  If Fiat were to join the merger, then all companies involved would massively benefit with the increase in power, thus becoming more competitive towards the strong competition of Volkswagen.

In regards to acquisitions, primarily it depends on which company we are focusing on, be that the company acquiring or the company being acquired.  From the lectures this week, I have learnt that companies pay a premium for well performing companies, which was demonstrated with the example of the Exxon-mobile deal. By understanding this in regard to shareholder wealth, the shareholders of the company being purchased for this high price often benefit from an increase in share price.

However, what about a poorly performing company? If an acquisition takes place where the company is poorly performing, the price agreeable may be considerably lower than the current value of the business, obviously negatively affecting the current shareholders investment. But, in some cases, could it be argued that if the acquisition of an inadequately performing business is saving shareholder wealth, from possible bankruptcy?

The main reason that drives most M&A’s is the idea of synergy. Why have the core capabilities of one organization when you can have two.  Investopedia.com highlights that  -

One plus one makes three: this equation is the special alchemy of a merger or an acquisition.  This concept believes that by the combination of two companies, the value of this is greater than them separate, in regards to their shareholders.