Tuesday, February 5, 2008

Motives behind M&A

Motives behind M&A:-

These motives are considered to add shareholder value:

  • Economies of scale: This refers to the fact that the combined company can often reduce duplicate departments or operations, lowering the costs of the company relative to the same revenue stream, thus increasing profit.
  • Increased revenue/ Market Share: This motive assumes that the company will be absorbing a major competitor and thus increase its power to set prices.
  • Cross selling: For example, a bank buying a stock broker could then sell its banking products to the stock broker's customers, while the broker can sign up the bank's customers for brokerage accounts.
  • Synergy: Better use of complementary resources.
  • Taxes: A profitable company can buy a loss maker to use the target's loss as their advantage by reducing their tax liability.
  • Geographical or other diversification: This is designed to smooth the earnings results of a company, which over the long term smoothen the stock price of a company, giving conservative investors more confidence in investing in the company.
  • Vertical integration: Companies acquire part of a supply chain and benefit from the resources.

These motives are considered to not add shareholder value:

  • Diversification: While this may hedge a company against a downturn in an individual industry it fails to deliver value, since it is possible for individual shareholders to achieve the same hedge by diversifying their portfolios at a much lower cost than those associated with a merger.
  • Manager’s hubris (pride): manager's overconfidence about expected synergies from M&A which results in overpayment for the target company.
  • Empire building: Managers have larger companies to manage and hence more power.


.1) Revenue enhancement

2) Cost reductions

3) Lower taxes

4) Changing capital requirements

5) A lower cost of capital


1) Excessive premium

In a competitive bidding situation, a company may tend to pay more. Often highest bidder is one who overestimates value out of ignorance. Though he emerges as the winner, he happens to be in a way the unfortunate winner. This is called winners curse hypothesis.

2) Lack of research

Acquisition requires gathering a lot of data and information and analyzing it. It requires extensive research. A carelessly carried out research about the acquisition causes the destruction of acquirer's wealth.

3) Size Issues

A mismatch in the size between acquirer and target has been found to lead to poor acquisition performance. Many acquisitions fail either because of 'acquisition indigestion' through buying too big targets or failed to give the smaller acquisitions the time and attention it required

4) Diversification

Very few firms have the ability to successfully manage the diversified businesses. Unrelated diversification has been associated with lower financial performance, lower capital productivity and a higher degree of variance in performance.

Steps to Make Mergers and Acquisitions More Successful:-

  1. Improving negotiation and price by knowing the company's exact market position
  2. Providing credibility and insurance to investors and bankers
  3. Selecting the optimal acquisition candidate for your company.
  4. Identifying market opportunities that an acquisition strategy can exploit
  5. Measuring customer attitudes on company's products to indicate their image in market
  6. Providing customer demographic data that gives insight into future market potential and growth for targeted company
  7. Identifying opportunities for growth in market segmentation analysis
  8. Providing competitive benchmarking measurements to identify areas for fast improvement in company
  9. Measuring market and technical trends to forecast future growth potential of company's technology
  10. Identifying key trends in the market, the company's customers and relative position with competitors to pinpoint future problems and opportunities.

1 comment:

David Gomes said...

Mergers and acquisitions, also known as M&A, are corporate procedures of acquiring new resources by buying taking over other company or by consolidating with them. Like any kind of company activity there are benefits and drawbacks for both mergers and acquisitions. Some of the positives include- the prospective to add value to a organization's main point here, the prospective to increase a company, and the prospective to add resources to a organization's holdings.

Mergers Acquisitions