Do mergers and acquisitions create value?

With all of the publicity surrounding company takeovers and companies joining together it is imperative to discuss the topic of whether or not mergers and acquisitions create value.
A merger is the combination of two business entities under common ownership. An acquisition is where a business entity engulfs another and takes ownership and managerial control. Differentiating between these two acts in real life cases has proven to be difficult and it has even been suggested that it is impossible to classify the relationships within the combined entity as a merger or a takeover. Such as the case of Unilever, where they bought a majority stake in a water purification company, Qinyuan. Although Unilever holds the majority stake in the company the chief executive of Qinyuan is keeping his position, which makes it difficult to distinguish whether or not it is a "takeover" or a merger. Therefore, I am going to discuss the value of mergers and acquisitions combined.


Firstly, I think its appropriate to acknowledge the motives behind mergers and acquisitions:

• Synergy - The company will have a greater value combined than separate.
• Market power
• Economies of scale
• Entry to new markets and industries
• Internalisation of transactions - Improving efficiency!
• Tax advantages
• Risk diversification
• Bargain buying
• Inefficient management - The management of the acquiring company is much more capable than that of the "acquiree".
• Undervalued shares
• Managerial motives
• Survival
• Free cash flow
• Third party motives - Advisers, suppliers and customers!

Reflecting some of these motives, according to the The Guardian, Dixons and Carphone Warehouse are discussing a £3.5bn merger. This deal will bring almost all of the above motives, if, of course ,it is a successful merger. They will have great market power, with over 3,000 stores, both companies will be expanding into new markets and industries.


To understand whether or not mergers or acquisitions add value to the entity we must consider different parties within the company. Mainly, stakeholders and managers. The essence of mergers and acquisitions, within capitalism, is too create value for the shareholders of the acquiring firm. However, various studies have examined whether acquisitions create value, and they have found that the target shareholders generally fare pretty well, while most acquisitions fail to create value for the acquirers. This is represented by the share price movement when the acquisition or merger is announced. Studies have concluded that the share price of the target company usually go up substantially, whilst the share price of the bidding company either experiences no increase or a reduction.
Of course the share price after the announcement is short-term and to look at shareholder value we must look at long-term value. A study by Hazelkorn and Zenner found that over the long-term, acquirers tended to slightly outperform their industry peers. They also stated that obviously some acquisitions create great shareholder wealth and others diminish it. It is down to whether or not the acquisition is successful.


For example, the merger of AOL and TimeWarner is probably one of the biggest failures in recent business history. In 2001 the deal was crowned "the deal of the century", in 2002 AOL had 26 million dial up customers and in 2009 it had 5.4 millions. Vast amounts of shareholder wealth was destroyed and the two eventually became separate entities in 2009.
However, in the case of mergers and acquisitions, success can be dependent upon the capabilities of the acquirer. For example, when Jaguar and Land Rover were under the ownership of Ford, up to 2008 they were struggling, and Ford was seeking financial assistance for the two companies and made the decision to sell them. Ford originally paid £1.6bn for Jaguar and £1.7bn for Land Rover in 1989 and 2000 respectively. Ford sold both businesses to Tata Motors for £1.15bn in 2008. Many analysts believed Tata Motors to be "round the twist". They are now eating there words as in 2013 Jaguar Land Rover was estimated to be worth around $16bn! This is down to successful leadership and extremely good decision-making from Tata Motors.


So do mergers and acquisitions create value? This is all down to whether or not they are successful (obviously). How do you generate a successful merger or acquisition? This is down to the capabilities of the leaders and the management. In the case of Ford the acquisitions were diabolical, whereas under Tata Motors, who took a very different approach to the company, it has become a roaring success. The success of mergers and acquisitions is not down to chance, but down to excellent decision-making!