MERGERS AND ACQUISITIONS

Mergers And Acquisitions

Mergers And Acquisitions

1. Introduction

Many decry the preponderance of merger failures and conclude that mergers and acquisitions (M&A) are failed strategies. However, analysis of the causes of failure has often been shallow and the measures of success weak. The research reported here focuses on what makes a merger successful and what is the appropriate manner of evaluating merger success.

Many writers and business analysts have asserted that mergers and acquisitions (M&A) are doomed to fail and that M&A success is somehow at odds with the reality of the business world. They often point to a history of merger failures, concluding that bigger is not better and that mergers and acquisitions are failed strategies. While some studies have even indicated that 7 out of 10 mergers do not live up to their promises, the analysis of the causes of failure has often been shallow and the measures of success weak.

For decades, success and failure in M&A has been studied in terms of narrow and uninformative measures, such as short-term stock price, leading to the aforementioned claims that most mergers fail. Many have taken this finding at face value, moving on to the search for causes of failure, which include culture clash, lack of synergies, and flawed strategy. All things considered, the study of M&A desperately needs a new perspective and a new framework for analysis.

2. Mergers, acquisitions, and conglomerates

There is great need for clearer distinctions between three very different approaches to growth. Mergers, acquisitions, and conglomerates are often analyzed as if they were the same, but a clear distinction is necessary. Mergers of equals, such as JPMorganChase, involve two entities of relatively comparable stature coming together and taking the best of each company to form a completely new organization. Growth through acquisitions, such as Cisco's model, involves the much simpler process of fitting one smaller company into the existing structure of a larger organization. Conglomerates, such as Tyco, constitute a third type of entity in which large companies are brought together without any clear attempt to create synergies or meld strategies, keeping them separate to provide the advantages of decentralization and autonomy. To lump mergers, acquisitions, and conglomerates together prohibits a thorough understanding of either the determinants or the evaluation of success.

There is mixed evidence on the shareholder wealth effects of investment banks acting as M&A-advisors. For acquiring firms, Servaes and Zenner (1996) find no impact of investment banks on the returns earned by the acquiring firms' shareholders. Allen et al. (2004), who compare transactions advised by commercial banks against those advised by investment banks, show that returns are higher for acquirers that employ no advisor at all. Looking at different types of investment banks, Bowers and Miller (1990), Servaes and Zenner (1996), Kale et al. (2003), Rau (2000), Hunter and Jagtiani (2003) or Rau and Rodgers (2002) come to a similar conclusion: first-tier investment banks are not better in providing superior shareholder wealth effects compared to lower tier investment banks. Similar evidence for Swiss acquirers is documented by Lowinski ...