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Company A acquires Company B through a merger or acquisition, typically forming a new combined company. Mergers and acquisitions increased dramatically in the late 1990s and 2000s, with over 30,000 acquisitions globally per year valued at over $1.9 trillion. Drivers of M&A include technological changes, regulatory changes, globalization, and stock price appreciation giving companies funds to purchase others. However, integration between acquiring and acquired companies is often challenging, and value is not always created for shareholders of both firms.
Company A acquires Company B through a merger or acquisition, typically forming a new combined company. Mergers and acquisitions increased dramatically in the late 1990s and 2000s, with over 30,000 acquisitions globally per year valued at over $1.9 trillion. Drivers of M&A include technological changes, regulatory changes, globalization, and stock price appreciation giving companies funds to purchase others. However, integration between acquiring and acquired companies is often challenging, and value is not always created for shareholders of both firms.
Company A acquires Company B through a merger or acquisition, typically forming a new combined company. Mergers and acquisitions increased dramatically in the late 1990s and 2000s, with over 30,000 acquisitions globally per year valued at over $1.9 trillion. Drivers of M&A include technological changes, regulatory changes, globalization, and stock price appreciation giving companies funds to purchase others. However, integration between acquiring and acquired companies is often challenging, and value is not always created for shareholders of both firms.
¡ M & A: Company A (Acquirer) buys Company B (Acquired
Or Target Firm)
¡ Typically Creates A New Firm
§ Daimler Benz and Chrysler Merged To Become Daimler-Chrysler
(New Identity) ¡ Volume of M & A § 1999 – US$ 3.3 Trillion § 2000 – US$ 3.5 Trillion § 2004 – 30,000 Acquisitions Globally (One Every 18 Minutes) Valued at US$1.9 Trillion § 2007 – US$ 4.5 Trillion ▪ 47% of The $4.5 Trillion Involved Cross-Border ▪ M&A ¡ Technological change § Major companies jockeyed for position in rapidly evolving technologies ¡ Changes in regulatory environment § Examples liberalization of economies, opening up of FDIs, IJVs, etc. ¡ Globalization § Companies found they needed to be big to operate on the global stage: Markets, Resources, Knowledge, Human/Social Capital ¡ Stock price appreciation § Bull market in late 1990s gave some companies the means to purchase others § 56% Of Acquiring Firm Managers Reported Meeting Pre-Acquisition Performance Objectives § 70% Of Target Firm Managers Left Their Jobs within 5 Years § Both Managers Reported Acculturation Stress During Post Merger ¡ Market Power – Merged Firm Has Greater Power Over Consumers (Transfer of Wealth from Consumers to Firm) ¡ Efficiency – Focuses On Cost Side ¡ Resource Deployment – Redeployment of Competencies and Assets To Generate Economies of Scope ¡ Market Discipline – Protects Shareholders from Poor Management ¡ Compensation – Firm Size Positively Correlated With Executive Compensation
¡ Managerial Hubris – Managerial Ego and Exaggerated Self-
Confidence ¡ Environmental Uncertainty– Less Diversified Firms Pursue Acquisitions to Reduce Uncertainty
¡ Resource Dependence – Firms Acquire Other Firms To Reduce
Dependence On Scarce Resources ¡ Acquisition Experience – Prior Experience In Acquisitions Increases Likelihood of Subsequent Acquisition ¡ Firm Strategy – Companies Following A Global Strategy Have Higher Proportion of Greenfield Developments than Companies Following Multi-Domestic Strategies ¡ Firms Facing Strategic Hurdles (Lack of Resources, etc.,) More likely Targets for Acquisitions ¡ Value Creation Refers To Short-Term and Long-Term Stock Holder Returns to § Acquiring Firms’ Shareholders § Acquired Firms’ Shareholders § Performance of the Firm After Mergers and Acquisitions § Yes, M & A Creates Value for Shareholders ¡ Company A (Acquiring Firm) Buys Company B (Target or Acquired Firm) § Return To A’s Shareholders Either None or Negative § Return to B’s Shareholders Positive ¡ Over Payment for Target Firms ¡ Lack of Integration Of Target Firm and Acquiring Firm (Systems and Processes) ¡ Strategic Misfit Post-Acquisition ¡ Post Acquisition Loss of Talented Managers and Human Capital ¡ Cultural Conflict Between Acquiring and Target Firms ¡ Growth To Be By-Product of Profitability Not An End In Itsel