Mergers and acquisitions (M&As;) are the joining together of two or more firms. Mergers generally bring together two similar-sized firms, while acquisitions usually involve larger firms taking control of smaller firms. In either case, the purpose of mergers and acquisitions is to increase shareholder value. When M&As; are announced, company leaders typically argue the new combined companies will increase shareholders’ value through synergies, the combined correlated force of the new enterprise, resulting in a more efficient and profitable operation. Typical examples of synergies expected from mergers and acquisitions include
• ECONOMIES OF SCALE—one larger firm being able to produce at a lower cost per unit
• VERTICAL INTEGRATION—control of the means of PRODUCTION and distribution of PRODUCTs
• increased market share and power
• the acquisition of new technology
• gaining access to new customers
• increased geographic presence
• consolidation of markets
Mergers and acquisitions activity evolved out of the American Industrial Revolution. Before the advent of the large industrial CORPORATIONs, small-business enterprises rarely merged or were acquired. Management professor David M. Schweiger states, “Since the beginning of the twentieth century, M&As; have become a common part of the business landscape. During this relatively short period of time, trillions of dollars in deals have been struck and tens of millions of people have been affected.” Most early mergers were “horizontal consolidations,” the combination of two or more competing companies that produce the same goods and SERVICES in the same geographic area. These early mergers led to ANTITRUST LAWs and the creation of the FEDERAL TRADE COMMISSION (1914). Today, whenever a major firm in an industry announces a merger or acquisition, the announcement will include the statement “subject to antitrust approval.” Mergers and acquisitions activity gained increased public notice during the 1980s. Michael Milken, of the INVESTMENT BANKING firm Drexel Burnham Lambert, was a leader in the use of “junk BONDS” to purchase companies. These were speculative-grade high-RISK bonds backed by the ASSETS of the company being acquired. Often a company’s MANAGEMENT puts up small amounts of their own CAPITAL and issues junk bonds to finance their gaining control of the company. The biggest M&A; was the takeover of RJR Nabisco by the firm Kohlberg Kravis Roberts & Co. (KKR). Labeled “corporate raiders” by opponents, KKR argued managers were not doing their job and new LEADERSHIP was needed to improve the efficiency and profitability of businesses. Mergers and acquisitions activity peaked in the United States during the late 1990s. As Schweiger reports, “From 1992 through 2000 there were eight straight record years of worldwide M&A; activity.” Some of the biggest M&A; activity during that period included
• AOL–Time Warner
• Chevron–Texaco
• BP–Amoco–Arco
• AT&T;–TCI
• SBC–Ameritech
• Sandoz–Ciba Geigy
• Bell Atlantic–GTE
• Daimler–Chrysler
The joining of Daimler-Benz AG and Chrysler Corporation to form DaimlerChrysler was a typical merger effort. At the time, the CEOs of both companies pronounced the deal as a joining of equals and that power would be shared as equals. Daimler-Benz, manufacturer of Mercedes-Benz automobiles, is known for quality products. Chrysler is known as the least-cost U.S. auto manufacturer. Combined, the two companies expected to benefit from each other’s strength but have struggled in their implementation efforts. Numerous studies have found that, M&As; tend to benefit the target’s SHAREHOLDERS, but not the acquirer’s shareholders. . . . Studies also have shown that M&As; often result in job losses, as acquirers reduce costs through elimination of redundant jobs. . . . M&As; can affect employees’ well-being. Increased stress, can reduce, productivity, and loyalty lead to greater absenteeism. If M&As; have been shown to be of no benefit to most acquiring companies, the obvious question is: Why do businesses pursue this activity? Many factors influenced the large amount of M&A; activity during the late 1990s. M&A; efforts were driven by GLOBALIZATION and the expansion of the WORLD TRADE ORGANIZATION. It was also driven by advances in technology, expanding global communications, and the ability to outsource work to least-cost areas around the globe. M&A; efforts were also driven by DEREGULATION in many industries and countries and by skyrocketing STOCK MARKET prices, allowing many companies, particularly technology companies, to use shares of stock to acquire other companies. The goal in the M&A; frenzy was to create value. Value can be created by
• purchasing a target firm for less than its intrinsic, or stand-alone, value
• from synergies that can be created by integrating the firms
To evaluate a merger or acquisition, Schweiger suggests adding a variety of costs associated with the M&A.; These costs include the
• acquisition premium, the portion of the purchase price that exceeds the intrinsic value of the firm
• restructuring COSTS, typically including severance benefits for workers terminated
• transactions costs and attorney, investment banker, and consultant fees
• value leakage, the loss of cash flow during M&A; due to lost sales, decreased productivity, and employee turnover. Mergers and acquisitions involve what Schweiger calls “the integration process.” The five stages of integration include
• strategic and financial objectives
• the transaction stage
• the transition stage
• the integration stage
• evaluation
During the strategic and financial objectives stage, companies evaluate potential candidates through discreetly collecting information through primary sources (e.g., knowledgeable personal contacts) or secondary sources (e.g., public databases and periodicals). Once contact is made with the potential firm, negotiations, DUE DILIGENCE evaluation, and analysis of integration planning and potential begin. In the transactions stage, the two companies evaluate each other and typically sign a merger or acquisition agreement. Many colorful financial terms are associated with the transactions stage. A “friendly takeover” occurs when the company being acquired does not oppose the takeover. A “hostile takeover” occurs when the company being acquired opposes the effort. Companies opposing a takeover can use a variety of defense mechanisms. Shareholder amendments can block potential takeovers and companies can swallow a “poison pill” to make the acquisition unattractive. POISON-PILL STRATEGIES can come in many varieties, but all alter the financial position of the company being acquired. Another strategy is known as the “white knight” suitor, whereby the company being acquired sells itself to another firm, sometimes perceived as saving the company from an unacceptable suitor. Once a merger or acquisition has been completed, the transition stage begins. During this stage, decisions are made regarding the new structure of the combined business, what parts to integrate and what to allow to remain unchanged, and implementation strategies and time lines are determined. As Schweiger states, “No matter how well transition planning was conducted, many elements cannot be forecasted accurately. Executives and managers must therefore be prepared to make adjustments to plans as events change.” In other words, like a marriage, mergers and acquisitions contain many surprises. In fact, Schweiger reports, “Various consulting firms have also estimated that from one-half to two-thirds of M&As; do not live up to the financial expectations of those transacting them. . . . One study even estimated that the merger and acquisition failure rate is equivalent to the divorce rate in the United States!” During the evaluation stage, the merged firms address the question, “Did it work?” Often it has not lived up to expectations, leading to portions of the company being sold off. With the deflation of the dot-com bubble in spring 2000, followed by the RECESSION in 2001, M&A; activity dropped precipitously. As the Wall Street Journal reported, “there was no market. You couldn’t sell a company. . . . Better to not do a deal rather than do a deal that winds up looking stupid.” While M&A; activity has remained slow, it will probably pick up again as market conditions change.
See also SYNERGY.