Mergers and acquisition can be considered as different types of Foreign Direct Investment (for more information about FDI, please see the previous post). Mergers and Acquisitions are two different things, but since they work in a similar way, I will consider for the purpose of this blog that they are similar enough to be dealt with together.
To find an answer on whether or not mergers and acquisitions create shareholder value, I think it is primordial to understand at least partially the theory: how could mergers and acquisitions create shareholder value? According to Markides and Oyon (1998), value creation depends on different factors such as governance characteristics of the acquiring companies, the “competitiveness of the market for corporate control in different countries”, and, of course, the specificities of the mergers or acquisition.
For example, a few years ago, Procter and Gamble Co’s share (US company) lost 5% in one day after the company announced they acquired Crush Canada. On the other hand, when Viatech (US company) announced they acquired Dixie Union Verpackungen GmbH (German company), its shares’ price increased by 20%. I don’t think these differences are due to hazard. I think that the opinion (right or wrong!) people have about other countries have a major role in whether or not there will be shareholder value creation or destruction.
However, mergers and acquisitions are very complex procedures and very risky for the company. Indeed, they are most of the time very expensive: Kraft acquisition of Cadbury cost them about $19m! There are also numbers of risks to consider when acquiring another company going from financial risks to integration risks. But then, isn’t there other easier way for companies to create shareholder value, without being that risky, and towards which shareholders would be more satisfied with? Because let’s not forget that the costs for a merger or an acquisition are money the shareholder won’t receive… Of course there are other ways, but they probably are not that profitable…
On the other hand, people can argue that mergers and acquisitions are the only way or the easiest for a company to diversify, and therefore give its shareholders better dividends. I don’t think that when a company diversify, the first thought of its manager is the shareholder value. This is a more a strategic matter than a financial one in my opinion. Besides, if shareholders really want to diversify their share in different sector, they won’t ask the direction to buy another company in the new sector and take all these risks. I think they’ll probably just buy share from another company in the new sector…
We can also consider the question about mergers and acquisitions under a different angle. Should creating shareholder value be the only aim or mergers and acquisitions? I think it would be a bad idea to think that mergers and acquisitions are not good to anything if they can’t create shareholder value. Indeed, mergers and acquisitions, despite the risks highlighted before, can provide lots of advantages: overcome entry barriers, acquire core competence from other business, vertical/horizontal integration… However, commissions are here to prevent companies to become too dominant.
To conclude, I don’t think that it is possible to say if mergers and acquisitions really create shareholder value, or destroy it. I think that each merger and each acquisition should be considered independently. There are too many different factors to determine a general rule.
Aurelie, 11/03/12.
M&A activities bring about significant change including workers, business organizations, systems, shareholders, customers, and many other stakeholders. Organizations that want to flourish, endeavor to obtain businesses that improve their product profile and protected additional workers with specific skills. However, a lot of companies start M&A activity without acknowledging the effect on the company and the overall effect on the human factor within the two consolidating companies. M&A activities that are poorly handled can result in lost income, client discontentment, and worker attrition.
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