Synergy & managerial motives towards Mergers and Acquisitions: Can it be seen as value adding to shareholders?

Welcome back my lovely followers! This week we will not be talking about a rather long movie, let's keep it short and snappy. This week's topic will be focussed on mergers and acquisitions and the value (if there is any) effects on shareholders. How well do you think mergers and acquisitions are when it comes to value adding?

What is a merger and acquisition?  

Lets first talk about the relationship of mergers and acquisition and managers. Well, many of the ethical issues related to mergers and acquisitions stem from managerial conflicts of interest which is known as agency problems. Mergers and acquisitions can be seen to provide managers with more discretion in their jobs as well as reducing risk to their careers. Can we say this is true? If these are the primary reasons for engaging in a merger or acquisition as opposed to maximising shareholder value then I believe this can be seen as unethical? Study by Mckinsey & Co. found that approximately 60% of the acquisitions examined failed to earn returns greater than the annual cost of capital required to finance the acquisitions. What do my fellow readers feel about this?

Mergers & acquisitions based on managerial self-interest is targeting unrelated business to acquire. I feel there is less potential synergy in the acquisition of an unrelated business and therefore I think lower potential to enhance shareholder value with such an acquisition. Sorry guys, you are probably wondering what a synergy is? Let me explain... A synergy is the concept that the value and performance of two companies combined will be greater than the sum of the separate individual parts. Basically when value is created from a merger when the gain is greater than the transaction costs. Michael Jensen, showed that shareholders of the acquired firms often earn above-average returns from the acquisitions but that shareholders of the acquiring firms earn returns, on average, close to zero.

Let's talk about a real life example! Lloyd's & Cheltenham & Gloucester oh wait and TSB...

It seems a ruthless approach is the key they were not afraid to wield the cost-cutting scalpel. I personally believe, the shareholder 'value' delivered by sacking workers and closing branches has to be offset against the price of the acquisition to assess how much money has really been made.

"When they don't work, the two key management groups do not blend well together."                      

Past Mergers & Acquisition 

Another example of a merger and acquisition that did not benefit shareholder value is Italy based telecom company with Germany based telecommunications company Deutsche Telekom. When this merger was being discussed there was great talks about two executive officers working side by side. So little did we know shareholders opted for the rival from Olivetti's Roberto Colaninno, Telecom Italia's chief executive Franco Bernabe had to leave. Failure to create value can be down to "poor preliminary auditing of the target company" as well as "inadequate post-acquisition goals". Do we agree?

"More than half of mergers ultimately fail to create value."

Can we argue that mergers do not create value because if we go back to 1998 one of the largest announced mergers was the marriage between Citicorp and Traveler's Group estimated at approximately $77 billion in value and Exxon's acquisition of Mobil for an estimated $79 billion. SBC and Ameritech valued at approximately $61.8 billion and between Nations Bank Corp. and BancAmerica Corp. valued at approximately $60 billion. So this whole concept of mergers not creating value? Where do we go after seeing such value being created in the past.   

What about MARKET POWER?

I believe market power can also be gained when the firm acquires a company competing in an industry that is highly related to the acquiring firms industry.  strong example of this is when France's Suez Lyonnaise des Eaux S.A. paid $4.5 billion, including the cost of assuming some debt, to acquire U.S. based Nalco Chemical Company. Suez had received positive responses from this acquisition gaining a strong position in the critical US market while paying no more for the company than 11 times earnings before interest, tax and depreciation.

Lets wrap this all up my fellow readers!

Mergers & acquisitions may seem a great way to grow your company but this may not always be the case. Different motives come in the way when it comes to thinking about this. We can often overvalue what we have leading to failure.

Let me all know what you think in the comments below!

It's a wraaaaap!

RS.