Statistical studies over the last forty-five years show that, although there are success stories, very many mergers and acquisitions do not result in the increased operating profits that economics ...textbooks would lead one to expect. As consultancy McKinsey have put it, ‘Anyone who has researched merger success rates knows that roughly 70% fail’. Yet—mysteriously—M&A activity has boomed across the globe, with a forty-fold increase in deals done each year now compared with four decades ago, in spite of the adverse general evidence. How can it be that talented, energetic, highly skilled, law-abiding, income-maximising participants in the M&A market will often promote mergers that lead to no operating gains, frequently with adverse effects on the wider economy too? Drawing on findings from a wealth of statistical analyses and case evidence from many businesses, the book presents answers to this merger mystery. In a synthesis of ideas from several disciplines, solutions are detected in misaligned incentives, distorted financial engineering and information asymmetry. By revealing how weaknesses at multiple points can interact and cumulate to produce inefficient outcomes, the discussion serves as a corrective to the overwhelmingly positive tone of most commentary on M&A, whilst also advocating changes in participants’ contracts, in taxation, and in regulation which could significantly reduce the number of mergers that fail. Designed to be accessible to a wide readership, the book will be of interest to investors, to M&A practitioners and commentators, to researchers and students of economics, political economy, finance, management and accounting, and—importantly—to policy makers working in these areas.
Political and regulatory uncertainty is strongly negatively associated with merger and acquisition activity at the macro and firm levels. The strongest effects are for uncertainty regarding taxes, ...government spending, monetary and fiscal policies, and regulation. Consistent with a real options channel, the effect is exacerbated for less reversible deals and for firms whose product demand or stock returns exhibit greater sensitivity to policy uncertainty, but attenuated for deals that cannot be delayed due to competition and for deals that hedge firm-level risk. Contractual mechanisms (deal premiums, termination fees, MAC clauses) unanimously point to policy uncertainty increasing the target’s negotiating power.
The well-known economic theory predicts that consumer price will fall after a horizontal merger when the amount of marginal cost reduction from operating synergies exceeds the premerger markup of a ...merging firm. However, when a horizontal merger occurs in a multitier decentralized supply chain where a finite number of firms compete at each tier, we show that this result holds only when a merger occurs at the tier that acts as the leader in the supply chain. In this supply chain, a horizontal merger at any other tier will decrease consumer price when the cost reduction exceeds a certain threshold that is larger than the premerger markup. Moreover, this threshold is increasing as the supply chain gets longer and can be substantially larger than the premerger markup. When accounting for subsequent entry after a merger in long-run equilibrium, contrary to a common belief, a larger synergy from a merger does not necessarily benefit consumers more.
This paper was accepted by Yossiv Aviv, operations management.
Although numerous studies analyze mergers and acquisitions (M&As) in and out of developed economies (DE), a much smaller number of studies focus on M&As in and out of emerging economies (EE). Since ...there are significant differences in institutional environments, corporate governance practices, and markets between DE and EE, existing knowledge on acquisitions can be extended by examining M&As in and out of EE. This paper addresses this gap and identifies the main findings of studies on acquisitions in and out of EE. The review deals with EE M&A antecedents and performance outcomes, with a focus on what new insights can be gained and what new research directions are revealed. This paper also develops propositions regarding EE M&A antecedents and performance.
Does CEO overconfidence help to explain merger decisions? Overconfident CEOs over-estimate their ability to generate returns. As a result, they overpay for target companies and undertake ...value-destroying mergers. The effects are strongest if they have access to internal financing. We test these predictions using two proxies for overconfidence: CEOs’ personal over-investment in their company and their press portrayal. We find that the odds of making an acquisition are 65% higher if the CEO is classified as overconfident. The effect is largest if the merger is diversifying and does not require external financing. The market reaction at merger announcement (
-
90
basis points) is significantly more negative than for non-overconfident CEOs (
-
12
basis points). We consider alternative interpretations including inside information, signaling, and risk tolerance.
Using a large and unique patent-merger data set over the period 1984 to 2006, we show that companies with large patent portfolios and low R&D expenses are acquirers, while companies with high R&D ...expenses and slow growth in patent output are targets. Further, technological overlap between firm pairs has a positive effect on transaction incidence, and this effect is reduced for firm pairs that overlap in product markets. We also show that acquirers with prior technological linkage to their target firms produce more patents afterwards. We conclude that synergies obtained from combining innovation capabilities are important drivers of acquisitions.
This book pools the current know-how, and closes important knowledge gaps, to offer hands-on advice and practical answers to the many 'how to' questions relating to merger implementation. It provides ...a crucially important understanding of how to assess the chances of realising synergy potential and evaluate integration risks.
Learning in serial mergers: Evidence from a global sample Pandey, Vivek K.; Sutton, Ninon K.; Steigner, Tanja
Journal of business finance & accounting,
October/November 2021, 2021-10-00, 20211001, Volume:
48, Issue:
9-10
Journal Article
Peer reviewed
Open access
Do frequent acquirers learn from their experience in serial mergers? A recent stream of literature has proposed that the generally observed declining investor response (cumulative abnormal returns) ...to successive acquisitions by frequent acquirers may be evidence of learning, rather than the result of commonly attributed causes such as managerial hubris or empire building. We examine the learning hypothesis on a global scale, using a sample of 13,326 publicly listed acquiring firms representing 72 nations conducting 27,305 acquisitions over the period 1984–2014. Our results provide evidence of institutional‐based differences in acquirer learning on a global scale in the valuation of private targets. In contrast, we find evidence of hubris in takeovers of public targets, especially in the United States, and other competitive takeover markets, where acquirers experience persistent, significant losses over successive acquisitions, while targets continue to reap significant gains throughout the acquisition sequence.
We study the effects on M&A outcomes of CEO network centrality, which measures the extent and strength of a CEO׳s personal connections. High network centrality can allow CEOs to efficiently gather ...and control private information, facilitating value-creating acquisition decisions. We show, however, that M&A deals initiated by high-centrality CEOs, in addition to being more frequent, carry greater value losses to both the acquirer and the combined entity than deals initiated by low-centrality CEOs. We also document that high-centrality CEOs are capable of avoiding the discipline of the markets for corporate control and the executive labor market, and that the mitigating effect of internal governance on CEO actions is limited. Our evidence suggests that corporate decisions can be influenced by a CEO׳s position in the social hierarchy, with high-centrality CEOs using their power and influence to increase entrenchment and reap private benefits.
The vast majority of cross-border mergers involve private firms outside of the United States. We analyze a sample of 56,978 cross-border mergers between 1990 and 2007. We find that geography, the ...quality of accounting disclosure, and bilateral trade increase the likelihood of mergers between two countries. Valuation appears to play a role in motivating mergers: firms in countries whose stock market has increased in value, whose currency has recently appreciated, and that have a relatively high market-to-book value tend to be purchasers, while firms from weaker-performing economies tend to be targets.
PDF
