Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspect of strategic management, M&A can allow enterprises to grow or downsize, and change the nature of their business or competitive position.

Technically, a merger is the legal consolidation of two business entities into one, whereas an acquisition occurs when one entity takes ownership of another entity's share capital, equity interests or assets. A deal may be called a "merger of equals" if both CEOs agree that joining is in the best interest of both of their companies. From a legal and financial point of view, both mergers and acquisitions generally result in the consolidation of assets and liabilities under one entity, and the distinction between the two is not always clear.

In most countries, mergers and acquisitions must comply with antitrust or competition law. In the United States, for example, the Clayton Act outlaws any merger or acquisition that may "substantially lessen competition" or "tend to create a monopoly", and the Hart–Scott–Rodino Act requires companies to get "pre-clearance" from either the Federal Trade Commission or the U.S. Department of Justice's Antitrust Division for all mergers or acquisitions over a certain size.

Acquisition

An acquisition/takeover is the purchase of one business or company by another company or other business entity. Specific acquisition targets can be identified through myriad avenues, including market research, trade expos, sent up from internal business units, or supply chain analysis.[1] Such purchase may be of 100%, or nearly 100%, of the assets or ownership equity of the acquired entity.

A consolidation/amalgamation occurs when two companies combine to form a new enterprise altogether, and neither of the previous companies remains independently owned. Acquisitions are divided into "private" and "public" acquisitions, depending on whether the acquiree or merging company (also termed a target) is or is not listed on a public stock market. Some public companies rely on acquisitions as an important value creation strategy.[2] An additional dimension or categorization consists of whether an acquisition is friendly or hostile.[3]

Achieving acquisition success has proven to be very difficult, while various studies have shown that 50% of acquisitions were unsuccessful.[4] "Serial acquirers"[5] appear to be more successful with M&A than companies who make acquisitions only occasionally (see Douma & Schreuder, 2013, chapter 13). The new forms of buy out created since the crisis are based on serial type acquisitions known as an ECO Buyout which is a co-community ownership buy out and the new generation buy outs of the MIBO (Management Involved or Management & Institution Buy Out) and MEIBO (Management & Employee Involved Buy Out).

Whether a purchase is perceived as being "friendly" or "hostile" depends significantly on how the proposed acquisition is communicated to and perceived by the target company's board of directors, employees, and shareholders. It is normal for M&A deal communications to take place in a so-called "confidentiality bubble," wherein the flow of information is restricted pursuant to confidentiality agreements.[6] In the case of a friendly transaction, the companies cooperate in negotiations; in the case of a hostile deal, the board and/or management of the target is unwilling to be bought or the target's board has no prior knowledge of the offer. Hostile acquisitions can, and often do, ultimately become "friendly" as the acquirer secures endorsement of the transaction from the board of the acquiree company. This usually requires an improvement in the terms of the offer and/or through negotiation.

"Acquisition" usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control of a larger and/or longer-established company and retain the name of the latter for the post-acquisition combined entity. This is known as a reverse takeover. Another type of acquisition is the reverse merger, a form of transaction that enables a private company to be publicly listed in a relatively short time frame. A reverse merger is a type of merger where a privately held company, typically one with promising prospects and a need for financing, acquires a publicly listed shell company that has few assets and no significant business operations.

The combined evidence suggests that the shareholders of acquired firms realize significant positive "abnormal returns," while shareholders of the acquiring company are most likely to experience a negative wealth effect.[7] Most studies indicate that M&A transactions have a positive net effect, with investors in both the buyer and target companies seeing positive returns. This suggests that M&A creates economic value, likely by transferring assets to more efficient management teams who can better utilize them. (See Douma & Schreuder, 2013, chapter 13).

There are also a variety of structures used in securing control over the assets of a company, which have different tax and regulatory implications:

The terms "demerger", "spin-off" and "spin-out" are sometimes used to indicate a situation where one company splits into two, generating a second company which may or may not become separately listed on a stock exchange.

As per knowledge-based views, firms can generate greater values through the retention of knowledge-based resources which they generate and integrate.[8] Extracting technological benefits during and after acquisition is an ever-challenging issue because of organizational differences. Based on the content analysis of seven interviews, the authors concluded the following components for their grounded model of acquisition:

  1. Improper documentation and changing implicit knowledge makes it difficult to share information during acquisition.
  2. For acquired firm symbolic and cultural independence which is the base of technology and capabilities are more important than administrative independence.
  3. Detailed knowledge exchange and integrations are difficult when the acquired firm is large and high performing.
  4. Management of executives from acquired firm is critical in terms of promotions and pay incentives to utilize their talent and value their expertise.
  5. Transfer of technologies and capabilities are most difficult task to manage because of complications of acquisition implementation. The risk of losing implicit knowledge is always associated with the fast pace acquisition.

An increase in acquisitions in the global business environment requires enterprises to evaluate the key stake holders of acquisitions very carefully before implementation. It is imperative for the acquirer to understand this relationship and apply it to its advantage. Employee retention is possible only when resources are exchanged and managed without affecting their independence.[9]

Legal structures

A corporate acquisition can be structured legally as either an "asset purchase" in which the seller sells business assets and liabilities to the buyer, an "equity purchase" in which the buyer purchases equity interests in a target company from one or more selling shareholders or a "merger" in which one legal entity is combined into another entity by operation of the corporate law statute(s) of the jurisdiction of the merging entities.[10] In a transaction structured as a merger or an equity purchase, the buyer acquires all of the assets and liabilities of the acquired entity. In a transaction structured as an asset purchase, the buyer and seller agree on which assets and liabilities the buyer will acquire from the seller.

Asset purchases are common in technology transactions where the buyer is most interested in particular intellectual property rights but does not want to acquire liabilities or other contractual relationships.[11] An asset purchase structure may also be used when the buyer wishes to buy a particular division or unit of a company which is not a separate legal entity. Divestitures present a variety of unique challenges, such as identifying the assets and liabilities that pertain solely to the unit being sold, determaining whether the unit relies on services from other parts of the seller's organization, transferring employees, moving permits and licenses, and safeguarding against potential competition from the seller in the same business sector after the transaction is completed.[12]

Types of mergers

From an economic point of view, business combinations can also be classified as horizontal, vertical and conglomerate mergers (or acquisitions). A horizontal merger is between two competitors in the same industry. A vertical merger occurs when two firms combine across the value chain, such as when a firm buys a former supplier (backward integration) or a former customer (forward integration). When there is no strategic relatedness between an acquiring firm and its target, this is called a conglomerate merger (Douma & Schreuder, 2013)[13]

The form of merger most often employed is a triangular merger, where the target company merges with a shell company wholly owned by the buyer, thus becoming a subsidiary of the buyer. In a "forward triangular merger", the target company merges into the subsidiary, with the subsidiary as the surviving company of the merger; a "reverse triangular merger" is similar except that the subsidiary merges into the target company, with the target company surviving the merger.[10]

Mergers, asset purchases and equity purchases are each taxed differently, and the most beneficial structure for tax purposes is highly situation-dependent. Under the U.S. Internal Revenue Code, a forward triangular merger is taxed as if the target company sold its assets to the shell company and then liquidated, them whereas a reverse triangular merger is taxed as if the target company's shareholders sold their stock in the target company to the buyer.[14]

Documentation

The documentation of an M&A transaction often begins with a letter of intent. The letter of intent generally does not bind the parties to commit to a transaction, but may bind the parties to confidentiality and exclusivity obligations so that the transaction can be considered through a due diligence process involving lawyers, accountants, tax advisors, and other professionals, as well as business people from both sides.[12]

After due diligence is complete, the parties may proceed to draw up a definitive agreement, known as a "merger agreement", "share purchase agreement," or "asset purchase agreement" depending on the structure of the transaction. Such contracts are typically 80 to 100 pages long and focus on five key types of terms:[15]

Following the closing of a deal, adjustments may be made to some of the provisions outlined in the purchase agreement, such as the purchase price. These adjustments are subject to enforceability issues in certain situations. Alternatively, certain transactions use the 'locked box' approach, where the purchase price is fixed at signing and based on the seller's equity value at a pre-signing date and an interest charge.

Business valuation

Further information: Business valuation, Valuation (finance) § Business valuation, Investment banking § Corporate finance, and Corporate finance § Investment and project valuation

The assets of a business are pledged to two categories of stakeholders: equity owners and owners of the business' outstanding debt. The core value of a business, which accrues to both categories of stakeholders, is called the Enterprise Value (EV), whereas the value which accrues just to shareholders is the Equity Value (also called market capitalization for publicly listed companies). Enterprise Value reflects a capital structure neutral valuation and is frequently a preferred way to compare value as it is not affected by a company's, or management's, strategic decision to fund the business either through debt, equity, or a portion of both.[16] Five common ways to "triangulate" the enterprise value of a business are:

  1. asset valuation: the price paid is the value of the "easily salable parts"; the main approaches to valuing these are book value and liquidation value
  2. historical earnings valuation: the price is such that the payment for the business (or return targeted by the investor), would have been supported by the business's own earnings or cash-flow averaged over the previous 3–5 years; see also Earnout
  3. future maintainable earnings valuation: similarly, but forward looking; see generally, Cash flow forecasting and Financial forecast, and re "maintainability", Sustainable growth rate § From a financial perspective and Owner earnings.
  4. relative valuation: the price paid per dollar of earnings or revenue is based on the same multiple for comparable companies and / or recent comparable transactions
  5. discounted cash flow valuation (DCF): the price equates to the value of "all" [17] future cash-flows - with synergies and tax given special attention - as discounted to today; see § Determine cash flow for each forecast period under Valuation using discounted cash flows, which compares M&A DCF models to other cases.

Professionals who value businesses generally do not use just one method, but a combination. Valuations implied using these methodologies can prove different to a company's current trading valuation. For public companies, the market based enterprise value and equity value can be calculated by referring to the company's share price and components on its balance sheet. The valuation methods described above represent ways to determine value of a company independently from how the market currently, or historically, has determined value based on the price of its outstanding securities.

Most often value is expressed in a Letter of Opinion of Value (LOV) when the business is being valued informally. Formal valuation reports generally get more detailed and expensive as the size of a company increases, but this is not always the case as the nature of the business and the industry it is operating in can influence the complexity of the valuation task.

Objectively evaluating the historical and prospective performance of a business is a challenge faced by many. Generally, parties rely on independent third parties to conduct due diligence studies or business assessments. To yield the most value from a business assessment, objectives should be clearly defined and the right resources should be chosen to conduct the assessment in the available timeframe.

As synergy plays a large role in the valuation of acquisitions, it is paramount to get the value of synergies right; as briefly alluded to re DCF valuations. Synergies are different from the "sales price" valuation of the firm, as they will accrue to the buyer. Hence, the analysis should be done from the acquiring firm's point of view. Synergy-creating investments are started by the choice of the acquirer, and therefore they are not obligatory, making them essentially real options. To include this real options aspect into analysis of acquisition targets is one interesting issue that has been studied lately.[18] See also contingent value rights.

Financing

Mergers are generally differentiated from acquisitions partly by the way in which they are financed and partly by the relative size of the companies. Various methods of financing an M&A deal exist:

Cash

Payment by cash. Such transactions are usually termed acquisitions rather than mergers because the shareholders of the target company are removed from the picture and the target comes under the (indirect) control of the bidder's shareholders.

Stock

Payment in the form of the acquiring company's stock, issued to the shareholders of the acquired company at a given ratio proportional to the valuation of the latter. They receive stock in the company that is purchasing the smaller subsidiary. See Stock swap, Swap ratio.

Financing options

There are some elements to think about when choosing the form of payment. When submitting an offer, the acquiring firm should consider other potential bidders and think strategically. The form of payment might be decisive for the seller. With pure cash deals, there is no doubt on the real value of the bid (without considering an eventual earnout). The contingency of the share payment is indeed removed. Thus, a cash offer preempts competitors better than securities. Taxes are a second element to consider and should be evaluated with the counsel of competent tax and accounting advisers. Third, with a share deal the buyer's capital structure might be affected and the control of the buyer modified. If the issuance of shares is necessary, shareholders of the acquiring company might prevent such capital increase at the general meeting of shareholders. The risk is removed with a cash transaction. Then, the balance sheet of the buyer will be modified and the decision maker should take into account the effects on the reported financial results. For example, in a pure cash deal (financed from the company's current account), liquidity ratios might decrease. On the other hand, in a pure stock for stock transaction (financed from the issuance of new shares), the company might show lower profitability ratios (e.g. ROA). However, economic dilution must prevail towards accounting dilution when making the choice. The form of payment and financing options are tightly linked. If the buyer pays cash, there are three main financing options:

Specialist advisory firms

M&A advice is provided by full-service investment banks- who often advise and handle the biggest deals in the world (called bulge bracket) - and specialist M&A firms, who provide M&A only advisory, generally to mid-market, select industries and SBEs.

Highly focused and specialized M&A advice investment banks are called boutique investment banks.

Motivation

Improving financial performance or reducing risk

The dominant rationale used to explain M&A activity is that acquiring firms seek improved financial performance or reduce risk. The following motives are considered to improve financial performance or reduce risk:

Megadeals—deals of at least one $1 billion in size—tend to fall into four discrete categories: consolidation, capabilities extension, technology-driven market transformation, and going private.

Other types

On average and across the most commonly studied variables, acquiring firms' financial performance does not positively change as a function of their acquisition activity.[25] Therefore, additional motives for merger and acquisition that may not add shareholder value include:

Different types

By functional roles in market

The M&A process itself is a multifaceted which depends upon the type of merging companies.

By business outcome

The M&A process results in the restructuring of a business's purpose, corporate governance and brand identity.

Arm's length mergers

An arm's length merger is a merger:

  1. approved by disinterested directors and
  2. approved by disinterested stockholders:

″The two elements are complementary and not substitutes. The first element is important because the directors have the capability to act as effective and active bargaining agents, which disaggregated stockholders do not. But, because bargaining agents are not always effective or faithful, the second element is critical, because it gives the minority stockholders the opportunity to reject their agents' work. Therefore, when a merger with a controlling stockholder was: 1) negotiated and approved by a special committee of independent directors; and 2) conditioned on an affirmative vote of a majority of the minority stockholders, the business judgment standard of review should presumptively apply, and any plaintiff ought to have to plead particularized facts that, if true, support an inference that, despite the facially fair process, the merger was tainted because of fiduciary wrongdoing.″[34]

Strategic mergers

A Strategic merger usually refers to long-term strategic holding of target (Acquired) firm. This type of M&A process aims at creating synergies in the long run by increased market share, broad customer base, and corporate strength of business. A strategic acquirer may also be willing to pay a premium offer to target firm in the outlook of the synergy value created after M&A process.

Acqui-hire

The term "acqui-hire" is used to refer to acquisitions where the acquiring company seeks to obtain the target company's talent, rather than their products (which are often discontinued as part of the acquisition so the team can focus on projects for their new employer). In recent years, these types of acquisitions have become common in the technology industry, where major web companies such as Facebook, Twitter, and Yahoo! have frequently used talent acquisitions to add expertise in particular areas to their workforces.[35][36]

Merger of equals

Merger of equals is often a combination of companies of a similar size. Since 1990, there have been more than 625 M&A transactions announced as mergers of equals with a total value of US$2,164.4 bil.[37] Some of the largest mergers of equals took place during the dot-com bubble of the late 1990s and in the year 2000: AOL and Time Warner (US$164 bil.), SmithKline Beecham and Glaxo Wellcome (US$75 bil.), Citicorp and Travelers Group (US$72 bil.). More recent examples this type of combinations are DuPont and Dow Chemical (US$62 bil.) and Praxair and Linde (US$35 bil.).

Research and statistics for acquired organizations

An analysis of 1,600 companies across industries revealed the rewards for M&A activity were greater for consumer products companies than the average company. For the period 2000–2010, consumer products companies turned in an average annual TSR of 7.4%, while the average for all companies was 4.8%.

Given that the cost of replacing an executive can run over 100% of his or her annual salary, any investment of time and energy in re-recruitment will likely pay for itself many times over if it helps a business retain just a handful of key players that would have otherwise left.

Organizations should move rapidly to re-recruit key managers. It's much easier to succeed with a team of quality players that one selects deliberately rather than try to win a game with those who randomly show up to play.

Brand considerations

Mergers and acquisitions often create brand problems, beginning with what to call the company after the transaction and going down into detail about what to do about overlapping and competing product brands. Decisions about what brand equity to write off are not inconsequential. And, given the ability for the right brand choices to drive preference and earn a price premium, the future success of a merger or acquisition depends on making wise brand choices. Brand decision-makers essentially can choose from four different approaches to dealing with naming issues, each with specific pros and cons:[38]

  1. Keep one name and discontinue the other. The strongest legacy brand with the best prospects for the future lives on. In the merger of United Airlines and Continental Airlines, the United brand will continue forward, while Continental is retired.
  2. Keep one name and demote the other. The strongest name becomes the company name and the weaker one is demoted to a divisional brand or product brand. An example is Caterpillar Inc. keeping the Bucyrus International name.[39]
  3. Keep both names and use them together. Some companies try to please everyone and keep the value of both brands by using them together. This can create an unwieldy name, as in the case of PricewaterhouseCoopers, which has since changed its brand name to "PwC".
  4. Discard both legacy names and adopt a totally new one. The classic example is the merger of Bell Atlantic with GTE, which became Verizon Communications. Not every merger with a new name is successful. By consolidating into YRC Worldwide, the company lost the considerable value of both Yellow Freight and Roadway Corp.

The factors influencing brand decisions in a merger or acquisition transaction can range from political to tactical. Ego can drive choice just as well as rational factors such as brand value and costs involved with changing brands.[39]

Beyond the bigger issue of what to call the company after the transaction comes the ongoing detailed choices about what divisional, product and service brands to keep. The detailed decisions about the brand portfolio are covered under the topic brand architecture.

History

See also: Corporate finance § History

Most histories of M&A begin in the late 19th century United States. However, mergers coincide historically with the existence of companies. In 1708, for example, the East India Company merged with an erstwhile competitor to restore its monopoly over the Indian trade. In 1784, the Italian Monte dei Paschi and Monte Pio banks were united as the Monti Reuniti.[40] In 1821, the Hudson's Bay Company merged with the rival North West Company.

The Great Merger Movement: 1895–1905

The Great Merger Movement was a predominantly U.S. business phenomenon that happened from 1895 to 1905. During this time, small firms with little market share consolidated with similar firms to form large, powerful institutions that dominated their markets, such as the Standard Oil Company, which at its height controlled nearly 90% of the global oil refinery industry. It is estimated that more than 1,800 of these firms disappeared into consolidations, many of which acquired substantial shares of the markets in which they operated. The vehicle used were so-called trusts. In 1900 the value of firms acquired in mergers was 20% of GDP. In 1990 the value was only 3% and from 1998 to 2000 it was around 10–11% of GDP. Companies such as DuPont, U.S. Steel, and General Electric that merged during the Great Merger Movement were able to keep their dominance in their respective sectors through 1929, and in some cases today, due to growing technological advances of their products, patents, and brand recognition by their customers. There were also other companies that held the greatest market share in 1905 but at the same time did not have the competitive advantages of the companies like DuPont and General Electric. These companies such as International Paper and American Chicle saw their market share decrease significantly by 1929 as smaller competitors joined forces with each other and provided much more competition. The companies that merged were mass producers of homogeneous goods that could exploit the efficiencies of large volume production. In addition, many of these mergers were capital-intensive. Due to high fixed costs, when demand fell, these newly merged companies had an incentive to maintain output and reduce prices. However more often than not mergers were "quick mergers". These "quick mergers" involved mergers of companies with unrelated technology and different management. As a result, the efficiency gains associated with mergers were not present. The new and bigger company would actually face higher costs than competitors because of these technological and managerial differences. Thus, the mergers were not done to see large efficiency gains, they were in fact done because that was the trend at the time. Companies which had specific fine products, like fine writing paper, earned their profits on high margin rather than volume and took no part in the Great Merger Movement.[citation needed]

Short-run factors

One of the major short run factors that sparked the Great Merger Movement was the desire to keep prices high. However, high prices attracted the entry of new firms into the industry.

A major catalyst behind the Great Merger Movement was the Panic of 1893, which led to a major decline in demand for many homogeneous goods. For producers of homogeneous goods, when demand falls, these producers have more of an incentive to maintain output and cut prices, in order to spread out the high fixed costs these producers faced (i.e. lowering cost per unit) and the desire to exploit efficiencies of maximum volume production. However, during the Panic of 1893, the fall in demand led to a steep fall in prices.

Another economic model proposed by Naomi R. Lamoreaux for explaining the steep price falls is to view the involved firms acting as monopolies in their respective markets. As quasi-monopolists, firms set quantity where marginal cost equals marginal revenue and price where this quantity intersects demand. When the Panic of 1893 hit, demand fell and along with demand, the firm's marginal revenue fell as well. Given high fixed costs, the new price was below average total cost, resulting in a loss. However, also being in a high fixed costs industry, these costs can be spread out through greater production (i.e. higher quantity produced). To return to the quasi-monopoly model, in order for a firm to earn profit, firms would steal part of another firm's market share by dropping their price slightly and producing to the point where higher quantity and lower price exceeded their average total cost. As other firms joined this practice, prices began falling everywhere and a price war ensued.[41]

One strategy to keep prices high and to maintain profitability was for producers of the same good to collude with each other and form associations, also known as cartels. These cartels were thus able to raise prices right away, sometimes more than doubling prices. However, these prices set by cartels provided only a short-term solution because cartel members would cheat on each other by setting a lower price than the price set by the cartel. Also, the high price set by the cartel would encourage new firms to enter the industry and offer competitive pricing, causing prices to fall once again. As a result, these cartels did not succeed in maintaining high prices for a period of more than a few years. The most viable solution to this problem was for firms to merge, through horizontal integration, with other top firms in the market in order to control a large market share and thus successfully set a higher price.[42]

Long-run factors

In the long run, due to desire to keep costs low, it was advantageous for firms to merge and reduce their transportation costs thus producing and transporting from one location rather than various sites of different companies as in the past. Low transport costs, coupled with economies of scale also increased firm size by two- to fourfold during the second half of the nineteenth century. In addition, technological changes prior to the merger movement within companies increased the efficient size of plants with capital intensive assembly lines allowing for economies of scale. Thus improved technology and transportation were forerunners to the Great Merger Movement. In part due to competitors as mentioned above, and in part due to the government, however, many of these initially successful mergers were eventually dismantled. The U.S. government passed the Sherman Act in 1890, setting rules against price fixing and monopolies. Starting in the 1890s with such cases as Addyston Pipe and Steel Company v. United States, the courts attacked large companies for strategizing with others or within their own companies to maximize profits. Price fixing with competitors created a greater incentive for companies to unite and merge under one name so that they were not competitors anymore and technically not price fixing.

The economic history has been divided into Merger Waves based on the merger activities in the business world as:

Period Name Facet [43]
1893–1904 First Wave Horizontal mergers
1919–1929 Second Wave Vertical mergers
1955–1970 Third Wave Diversified conglomerate mergers
1974–1989 Fourth Wave Co-generic mergers; Hostile takeovers; Corporate Raiding
1993–2000 Fifth Wave Cross-border mergers, mega-mergers
2003–2008 Sixth Wave Globalisation, Shareholder Activism, Private Equity, LBO
2014– Seventh Wave Generic/balanced, horizontal mergers of Western companies acquiring emerging market resource producers. Reverse Mergers, Spac Mergers

Objectives in more recent merger waves

During the third merger wave (1965–1989), corporate marriages involved more diverse companies. Acquirers more frequently bought into different industries. Sometimes this was done to smooth out cyclical bumps, to diversify, the hope being that it would hedge an investment portfolio.

Starting in the fifth merger wave (1992–1998) and continuing today, companies are more likely to acquire in the same business, or close to it, firms that complement and strengthen an acquirer's capacity to serve customers.

In recent decades however, cross-sector convergence[44] has become more common. For example, retail companies are buying tech or e-commerce firms to acquire new markets and revenue streams. It has been reported that convergence will remain a key trend in M&A activity through 2015 and onward.

Buyers are not necessarily hungry for the target companies' hard assets. Some are more interested in acquiring thoughts, methodologies, people and relationships. Paul Graham recognized this in his 2005 essay "Hiring is Obsolete", in which he theorizes that the free market is better at identifying talent, and that traditional hiring practices do not follow the principles of free market because they depend a lot upon credentials and university degrees. Graham was probably the first to identify the trend in which large companies such as Google, Yahoo! or Microsoft were choosing to acquire startups instead of hiring new recruits,[45] a process known as acqui-hiring.

Many companies are being bought for their patents, licenses, market share, name brand, research staff, methods, customer base, or culture.[46] Soft capital, like this, is very perishable, fragile, and fluid. Integrating it usually takes more finesse and expertise than integrating machinery, real estate, inventory and other tangibles.

Largest deals in history

The top ten largest deals in M&A history cumulate to a total value of 1,118,963 mil. USD. (1.118 tril. USD).[47]

Date announced Acquiror name Acquiror mid-industry Acquiror nation Target name Target mid-industry Target nation Value of transaction ($mil)
11/14/1999 Vodafone AirTouch PLC Wireless United Kingdom Mannesmann AG Wireless Germany 202,785.13
01/10/2000[13] America Online Inc Internet Software & Services United States Time Warner Motion Pictures / Audio Visual United States 164,746.86
06/26/2015 Altice Sa Cable Luxembourg Altice Sa Cable Luxembourg 145,709.25
09/02/2013 Verizon Communications Inc Telecommunications Services United States Verizon Wireless Inc Wireless United States 130,298.32
08/29/2007 Shareholders Other Financials Switzerland Philip Morris Intl Inc Tobacco Switzerland 107,649.95
09/16/2015 Anheuser-Busch InBev SA/NV Food and Beverage Belgium SABMiller PLC Food and Beverage United Kingdom 101,475.79
04/25/2007 RFS Holdings BV Other Financials Netherlands ABN-AMRO Holding NV Banks Netherlands 98,189.19
11/04/1999 Pfizer Inc Pharmaceuticals United States Warner-Lambert Co Pharmaceuticals United States 89,167.72
10/22/2016 AT&T Media United States Time Warner Media United States 88,400
12/01/1998 Exxon Oil & Gas United States Mobil Oil & Gas United States 78,945.79

Cross-border

Introduction

In a study conducted in 2000 by Lehman Brothers, it was found that, on average, large M&A deals cause the domestic currency of the target corporation to appreciate by 1% relative to the acquirer's local currency. Until 2018, around 280,472 cross-border deals have been conducted, which cumulates to a total value of almost US$24,069 billion.[48]

The rise of globalization has exponentially increased the necessity for agencies such as the Mergers and Acquisitions International Clearing (MAIC), trust accounts and securities clearing services for Like-Kind Exchanges for cross-border M&A.[citation needed] On a global basis, the value of cross-border mergers and acquisitions rose seven-fold during the 1990s.[49] In 1997 alone, there were over 2,333 cross-border transactions, worth a total of approximately $298 billion. The vast literature on empirical studies over value creation in cross-border M&A is not conclusive, but points to higher returns in cross-border M&As compared to domestic ones when the acquirer firm has the capability to exploit resources and knowledge of the target's firm and of handling challenges. In China, for example, securing regulatory approval can be complex due to an extensive group of various stakeholders at each level of government. In the United Kingdom, acquirers may face pension regulators with significant powers, in addition to an overall M&A environment that is generally more seller-friendly than the U.S. Nonetheless, the current surge in global cross-border M&A has been called the "New Era of Global Economic Discovery".[50]

In little more than a decade, M&A deals in China increased by a factor of 20, from 69 in 2000 to more than 1,300 in 2013.

In 2014, Europe registered its highest levels of M&A deal activity since the financial crisis. Driven by U.S. and Asian acquirers, inbound M&A, at $320.6 billion, reached record highs by both deal value and deal count since 2001.

Approximately 23 percent of the 416 M&A deals announced in the U.S. M&A market in 2014 involved non-U.S. acquirers.

For 2016, market uncertainties, including Brexit and the potential reform from a U.S. presidential election, contributed to cross-border M&A activity lagging roughly 20% behind 2015 activity.

In 2017, the controverse trend which started in 2015, decreasing total value but rising total number of cross border deals, kept going. Compared on a year on year basis (2016–2017), the total number of cross border deals decreased by −4.2%, while cumulated value increased by 0.6%.[51]

Even mergers of companies with headquarters in the same country can often be considered international in scale and require MAIC custodial services. For example, when Boeing acquired McDonnell Douglas, the two American companies had to integrate operations in dozens of countries around the world (1997). This is just as true for other apparently "single-country" mergers, such as the $29-billion merger of Swiss drug makers Sandoz and Ciba-Geigy (now Novartis).

In emerging countries

M&A practice in emerging countries differs from more mature economies, although transaction management and valuation tools (e.g. DCF, comparables) share a common basic methodology. In China, India or Brazil for example, differences affect the formation of asset price and on the structuring of deals. Profitability expectations (e.g. shorter time horizon, no terminal value due to low visibility) and risk represented by a discount rate must both be properly adjusted.[52] In a M&A perspective, differences between emerging and more mature economies include: i) a less developed system of property rights, ii) less reliable financial information, iii) cultural differences in negotiations, and iv) a higher degree of competition for the best targets.

If not properly dealt with, these factors will likely have adverse consequences on return-on-investment (ROI) and create difficulties in day-to-day business operations. It is advisable that M&A tools designed for mature economies are not directly used in emerging markets without some adjustment. M&A teams need time to adapt and understand the key operating differences between their home environment and their new market.

Failure

Despite the goal of performance improvement, results from mergers and acquisitions (M&A) are often disappointing compared with results predicted or expected. Numerous empirical studies show high failure rates of M&A deals. Studies are mostly focused on individual determinants. A book by Thomas Straub (2007) "Reasons for frequent failure in Mergers and Acquisitions"[56] develops a comprehensive research framework that bridges different perspectives and promotes an understanding of factors underlying M&A performance in business research and scholarship. The study should help managers in the decision-making process. The first important step towards this objective is the development of a common frame of reference that spans conflicting theoretical assumptions from different perspectives. On this basis, a comprehensive framework is proposed with which to understand the origins of M&A performance better and address the problem of fragmentation by integrating the most important competing perspectives in respect of studies on M&A. Furthermore, according to the existing literature, relevant determinants of firm performance are derived from each dimension of the model. For the dimension strategic management, the six strategic variables: market similarity, market complementarities, production operation similarity, production operation complementarities, market power, and purchasing power were identified as having an important effect on M&A performance. For the dimension organizational behavior, the variables acquisition experience, relative size, and cultural differences were found to be important. Finally, relevant determinants of M&A performance from the financial field were acquisition premium, bidding process, and due diligence. Three different ways in order to best measure post M&A performance are recognized: synergy realization, absolute performance, and finally relative performance.

Employee turnover contributes to M&A failures. The turnover in target companies is double the turnover experienced in non-merged firms for the ten years after the merger.[citation needed]

M&As involving small businesses are particularly problematic and have been found to take longer and cost more than expected with organisation cultural and effective communication with employees being key determinants of success and failure [57]

Many M&A fail due to lack of planning or execution of the plan. An empirical research study conducted between 1988 and 2002 found that "Successful acquisitions, as defined by return on investment and time to market, are more likely to involve complex products but minimal uncertainty about whether the product is functional and whether there is an appetite in the market."[58][59] But failed mergers and acquisitions are caused by "hasty purchases where information platforms between companies were incompatible and the product was not yet tested for release."[58] A recommendation to resolve these failed mergers is to wait for the product to become established in the market and research has been completed.

Deloitte[60] determines most companies do not do their due diligence in determining whether a M&A is the correct move due to these four reasons:

Transactions that undergo a due diligence process are more likely to be successful.[61]

A considerable body of research suggests that many mergers fail due to human factors such as issues with trust between employees of the two organizations or trust between employees and their leaders.[62]

Any M&A transaction, no matter the size or structure, can have a significant impact on the acquiring company. Developing and implementing a robust due diligence process can lead to a much better assessment of the risks and potential benefits of a transaction, enable the renegotiation of pricing and other key terms, and smooth the way towards a more effective integration.[60]

M&A can hinder innovation by mismanagement or cultural differences between companies. They can also create bottlenecks when they disrupt the flow of innovation with too many company policies and procedures. Market dominant companies can also be their own demise when presented with an M&A opportunity. Complacency and lack of due diligence may cause the market dominant company to miss the value of an innovative product or service.

See also

References

  1. ^ Stemler, Gregory; Welch, Shea; Johnson, Jeff; Mims, John; Davison, Brian. "Methods for Developing a Rigorous Pre-Deal M&A Strategy". Transaction Advisors. ISSN 2329-9134. (Subscription required.)
  2. ^ Rhéaume, Louis; Bhabra, Harjeet S. (1 July 2008). "Value creation in information-based industries through convergence: A study of U.S. mergers and acquisitions between 1993 and 2005". Information & Management. 45 (5): 304–311. doi:10.1016/j.im.2008.03.002.
  3. ^ "Eight Key Differences: Public vs. Private Company Acquisitions in the US" (PDF).
  4. ^ Investment banking explained pp. 223-224
  5. ^ "How "Serial Acquirers" Create Value - Strategic Corporate Finance: Applications in Valuation and Capital Structure [Book]". www.oreilly.com. Retrieved 2023-04-04.
  6. ^ Harwood, 2005
  7. ^ The Economist, 'The new rules of attraction', 15 Nov 2014
  8. ^ Rumyantseva, Maria, Grzegorz Gurgul, and Ellen Enkel. "Knowledge Integration after Mergers & Acquisitions." University of Mississippi Business Department. University of Mississippi, July 2002.
  9. ^ Ranft, Annette L., and Michael D. Lord. "Acquiring new technologies and capabilities: A grounded model of acquisition implementation." Organization science 13.4 (2002): 420-441.
  10. ^ a b Wachtell, Lipton, Rosen & Katz (2020). Takeover Law and Practice (PDF). p. 77.((cite book)): CS1 maint: multiple names: authors list (link)
  11. ^ Moore, Jim (2012-12-26). "Get acquired! An idiot's guide to technology M&A". Retrieved 19 August 2013.
  12. ^ a b "Mergers & Acquisitions Quick Reference Guide" (PDF). McKenna Long & Aldridge LLP. Archived from the original (PDF) on 3 March 2012. Retrieved 19 August 2013.
  13. ^ a b Schreuder, Hein (January 2013). "Economic approaches to mergers and acquisitions".
  14. ^ Griffin, William F. "Tax Aspects of Corporate Mergers and Acquisitions" (PDF). Davis Malm & D'Agostine, P.C. Archived from the original (PDF) on 11 May 2013. Retrieved 19 August 2013.
  15. ^ Barusch, Ronald (2010-11-09). "WSJ M&A 101: A Guide to Merger Agreements". WSJ Deal Journal. Retrieved 19 August 2013.
  16. ^ "How to Value a Business - SMERGERS". SMERGERS.
  17. ^ W. Brotherson, K. Eades, R. Harris, R. Higgins (2014). Company Valuation in Mergers and Acquisitions: How is Discounted Cash Flow Applied by Leading Practitioners?, Journal of Applied Finance, Vol. 24;2.
  18. ^ Collan, Mikael; Kinnunen Jani (2011). "A Procedure for the Rapid Pre-acquisition Screening of Target Companies Using the Pay-off Method for Real Option Valuation". Journal of Real Options and Strategy. 4 (1): 117–141. doi:10.12949/realopn.4.117.
  19. ^ King, D. R.; Slotegraaf, R.; Kesner, I. (2008). "Performance implications of firm resource interactions in the acquisition of R&D-intensive firms". Organization Science. 19 (2): 327–340. doi:10.1287/orsc.1070.0313.
  20. ^ Maddigan, Ruth; Zaima, Janis (1985). "The Profitability of Vertical Integration". Managerial and Decision Economics. 6 (3): 178–179. doi:10.1002/mde.4090060310.
  21. ^ Ng, Artie W.; Chatzkel, Jay; Lau, K.F.; Macbeth, Douglas (2012-07-20). "Dynamics of Chinese emerging multinationals in cross-border mergers and acquisitions". Journal of Intellectual Capital. 13 (3): 416–438. doi:10.1108/14691931211248963. ISSN 1469-1930.
  22. ^ Zhang, Yu; Wu, Xianming; Zhang, Hao; Lyu, Chan; Zhang, Yu; Wu, Xianming; Zhang, Hao; Lyu, Chan (2018-05-30). "Cross-Border M&A and the Acquirers' Innovation Performance: An Empirical Study in China". Sustainability. 10 (6): 1796. doi:10.3390/su10061796.
  23. ^ Cunningham, Colleen; Ederer, Florian; Ma, Song (2018). "Killer Acquisitions". SSRN Electronic Journal. doi:10.2139/ssrn.3241707. ISSN 1556-5068. S2CID 219391535.
  24. ^ Hollenbeck, Brett (2020). "Horizontal Mergers and Innovation in Concentrated Industries" (PDF). Quantitative Marketing and Economics. 18: 1–37. doi:10.1007/S11129-019-09218-2. S2CID 219125831.
  25. ^ King, D. R.; Dalton, D. R.; Daily, C. M.; Covin, J. G. (2004). "Meta-analyses of Post-acquisition Performance: Indications of Unidentified Moderators". Strategic Management Journal. 25 (2): 187–200. doi:10.1002/smj.371. S2CID 36682294.
  26. ^ Amihud, Yakov; Baruch, Lev (1981). "Risk Reduction as a Managerial Motive for Conglomerate Mergers". The Bell Journal of Economics. 12 (2): 605. doi:10.2307/3003575. JSTOR 3003575.
  27. ^ Roll, Richard (1986). "The Hubris Hypothesis of Corporate Takeovers". The Journal of Business. 59 (2): 197–216. doi:10.1086/296325. JSTOR 2353017.
  28. ^ Malmendier, Ulrike; Tate, Geoffrey (2008). "Who makes acquisitions? CEO overconfidence and the market's reaction". Journal of Financial Economics. 89 (1): 20–43. doi:10.1016/j.jfineco.2007.07.002. S2CID 12354773.
  29. ^ Twardawski, Torsten; Kind, Axel (2023). "Board overconfidence in mergers and acquisitions". Journal of Business Research. 165 (1). doi:10.1016/j.jbusres.2023.114026.
  30. ^ "RECOMMENDED CASH OFFER FOR EIDOS PLC BY SQEX LTD. TO BE EFFECTED BY MEANS OF A SCHEME OF ARRANGEMENT UNDER THE UK COMPANIES ACT 2006" (PDF). Square Enix. 12 February 2009. Archived from the original (PDF) on 23 March 2015. Retrieved 16 February 2018.
  31. ^ "From Software acquired by Japanese publisher Kadokawa Corporation". Engadget. Retrieved 2017-12-10.
  32. ^ "Notice Concerning Exchange of Shares to Convert Sammy NetWorks Co., Ltd., SEGA TOYS CO., LTD. and TMS ENTERTAINMENT, LTD. into Wholly Owned Subsidiaries of SEGA SAMMY HOLDINGS INC" (PDF). Sega Sammy Holdings Inc. 27 August 2010. Archived from the original (PDF) on 12 October 2013. Retrieved 9 January 2017.
  33. ^ a b "Merger & consolidation: overview". Sam Houston State University. Archived from the original on Dec 29, 2017. Retrieved 2017-12-10.
  34. ^ In re Cox Communications, Inc. Shareholders Litig., 879 A.2d 604, 606 (Del. Ch. 2005).
  35. ^ Hof, Robert. "Attention Startups: Here's How To Get Acqui-Hired By Google, Yahoo Or Twitter". Forbes. Retrieved 9 January 2014.
  36. ^ Sarah E. Needleman (September 12, 2012). "Start-Ups Get Snapped Up for Their Talent". Wall Street Journal.
  37. ^ "M&A by Transaction Type - IMAA-Institute". IMAA-Institute. Retrieved 2016-12-22.
  38. ^ "NewsBeast And Other Merger Name Options « Merriam Associates, Inc. Brand Strategies". Merriamassociates.com. Archived from the original on 2012-11-06. Retrieved 2012-12-18.
  39. ^ a b "Caterpillar's New Legs—Acquiring the Bucyrus International Brand « Merriam Associates, Inc. Brand Strategies". Merriamassociates.com. Archived from the original on 2012-10-30. Retrieved 2012-12-18.
  40. ^ "Monte dei Paschi di Siena Bank | About us | History | The Lorraine reform". 2009-03-17. Retrieved 2012-12-18.
  41. ^ Lamoreaux, Naomi R. "The great merger movement in American business, 1895-1904." Cambridge University Press, 1985.
  42. ^ "Principles of Economics(10.2 Oligopoly)". UH Pressbooks The University of Hawaiʻi. 2016.
  43. ^ "Insights | KPMG | ZA". KPMG. 2016-11-15. Retrieved 2017-12-11.
  44. ^ "Corporate America's Dealmakers Are Cross-Pollinating". Bloomberg.com. 2 January 2018. Retrieved 2018-10-18.
  45. ^ "Hiring is Obsolete". Retrieved 18 February 2015.
  46. ^ Hollenbeck, Brett (2020). "Horizontal Mergers and Innovation in Concentrated Industries" (PDF). Quantitative Marketing and Economics. 18: 1–37. doi:10.1007/S11129-019-09218-2. S2CID 219125831.
  47. ^ "M&A Statistics - Worldwide, Regions, Industries & Countries". Institute for Mergers, Acquisitions and Alliances (IMAA). Retrieved 2018-02-28.
  48. ^ "M&A by Transaction Type". Institute for Mergers, Acquisitions and Alliances (IMAA). Retrieved 2018-02-27.
  49. ^ United Nations Conference on Trade and Development, 2000, World Investment Report 2000: Cross-border Mergers and Acquisitions and Development (Overview), New York and Geneva, p. 10.
  50. ^ Ayisi-Cromwell, M. "The New Era of Global Economic Discovery: Opportunities and Challenges". Thomson Reuters Emerging Markets Investment Forum. New York, NY. 19 Sep. 2012. Chairman's Opening Remarks.
  51. ^ "M&A by Transaction Type". IMAA-Institute. Retrieved 2018-02-22.
  52. ^ Donald R. Lessart. "Incorporating Country risk in the valuation of offshore projects", MIT, Journal of Applied Corporate Finance, volume 9, number 3, 1996
  53. ^ Alchian, Armen, and Harold Demsetz. "The Property Rights Paradigm." Journal of Economic History 33, no. 1 (1973): 16–27
  54. ^ Feng Chen, Ole-Kristian Hope, Qingyuan Li, Xin Wang. "The Property Rights Paradigm."Financial Reporting Quality and Investment Efficiency of Private Firms in Emerging Markets, working paper, University of Toronto, Wuhan University Chinese University of Hong Kong, July 6, 2010
  55. ^ as an illustration, Laurence J. Brahm. "The art of the deal in China." Tuttle Publishing, April 2007, 160 pages, ISBN 0804839026
  56. ^ [Straub, Thomas (2007). Reasons for frequent failure in Mergers and Acquisitions: A comprehensive analysis. Wiesbaden: Deutscher Universitäts-Verlag (DUV), Gabler Edition Wissenschaft. ISBN 978-3-8350-0844-1.]
  57. ^ Steen, Adam; Turpie, Keith; Ng, Gee Wan (2014). "Microcap M&A: An Exploratory Study". Australasian Accounting, Business and Finance Journal. 8 (2): 52–70. doi:10.14453/aabfj.v8i2.5.
  58. ^ a b Mandel, Michael and Carew, Diana (2011, November 11). Innovation by Acquisition: New Dynamics of High-Tech Competition. Progressive Policy Institute. https://www.progressivepolicy.org/wp-content/uploads/2011/11/11.2011-Mandel_Carew-Innovation_by_Acquisition-New_Dynamics_of_Hightech_Competition.pdf
  59. ^ Chaudhuri, Saikat (2004). Can Innovation Be Bought: Managing Acquisitions in Dynamic Environments. Harvard Business School.((cite book)): CS1 maint: location missing publisher (link)
  60. ^ a b "M&A: The Intersection of Due Diligence and Governance | Deloitte US". Deloitte United States. Retrieved 2021-04-27.
  61. ^ "Post-Deal Success Starts at Due Diligence Stage". Bureau of National Affairs Corporate Weekly. 45: 357.
  62. ^ Lipponen, Jukka; Kaltiainen, Janne; Van Der Werff, Lisa; Steffens, Niklas K. (2020). "Merger-specific trust cues in the development of trust in new supervisors during an organizational merger: A naturally occurring quasi-experiment". The Leadership Quarterly. 31 (4): 101365. doi:10.1016/j.leaqua.2019.101365. S2CID 212957211.

Further reading