M&A

Merger and Acquisitions according to this article come in waves.

The Buyers Market generally occurs when the economy experiences a downturn. In this situation, companies which possibly may have to close up shop sell out for a small profit to the buying company. Deals can be struck, and after restructuring, a strong company can emerge with new management in the board room. During this period few deals are struck because management fears making a deal that goes under and costs them their job. In the second phase, once the market improves, fewer companies are as risk adverse and an increase in deals struck occurs mostly due to increased financing. The third phase is a boom in mergers, since heads of companies feel that “everyone is doing it” and they won’t receive criticism for larger (premium) bids. The final phase, characterized by even larger premiums, is often 100% or above the company’s actual value. By overpaying, these CEOs hope that in the long run the company will vastly improve, yet this doesn’t always occur. An example of this is Time Warner’s acquisition of AOL.

Mergers do not always mean increased profits. The upfront cost of acquiring the company is a large fixed cost that may never be fully made back (2/3rds of mergers fail according to the article). Then, once a company is acquired, restructuring occurs. These costs can vary depending on what the acquired company will be focused towards. Even if bids are placed, there is no promise the merge will occur. Antitrust law bars companies from having too large a market share. This means that lawyers become a cost.

Acquiring a new company sounds like a great way to increase revenue, but the pitfalls are many and often depending on premiums… it may have been better just to say no.

3 thoughts on “M&A

  1. There’s a lot of work on merger waves – see our Martin text. My sense is that the availability of cheap finance helps.

    One motive is surely empire building. Eaton at Chrysler made $110 million from selling to Daimler, while on the buying end Jürgen Schrempp was heralded as an industry titan, securing his place at the head of his firm even as profits fell. M&A is a world of big egos and (all too often) rubber-stamping boards of directors.

  2. As we’ve seen in the course, mergers are very often costly, rather than profitable. It largely depends on how much market power the new firm has, as well as whether the merger is approved by the government.

  3. It shouldn’t be surprising that most mergers do not end well. A lot of mergers occur instead of one firm exiting the market later. The resulting firm must restructure the purchased firm, which was often operating under losses. This is easier said than done.

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