Motives for mergers and acquisitions: shareholder value

Question

Should mergers and acquisitions only be undertaken if they add value to shareholders?

Answer

There are a number of motives for undertaking a merger or an acquisition. One of the key reasons is to increase shareholder’s wealth. If a merger or an acquisition increases the market value of a firm, this increase in value directly benefits the shareholders. A merger may increase the company’s profits and it is also possible to create synergies by increasing the product range, eliminating waste, reducing/sharing costs and operating more efficiently. Other reasons for undertaking a merger or acquisition are: synergy, diversification, self-interest of managers, tax efficiency, economies of scale and scope, etc. There is a lot of literature (mixed results) around the post-acquisition performance of acquiring firms and target firms. For instance, Cartwright and Schoenberg (2006) argue that acquisitions tend to deliver at best a mixed performance to the stakeholders involved; shareholders in target firms tend to enjoy positive short-term returns, whereas shareholders in the bidding firms often experience share price underperformance in the months after the acquisition, with insignificant overall wealth gains for portfolio holders (Agrawal and Jaffe 2000).

References

Agrawal, A. and Jaffe,J (2000) The post-merger performance puzzle. Advances in Mergers and Acquisitions, 1, 119–56. Schoenberg, R. (2006) measuring the performance of corporate acquisitions: an empirical comparison of alternative metrics. British Journal of Management, 17(4), 361–70.