Creating Value from M&A’s: The
Challenges (2010 – Sudarsanam)
(W1/2) Chapter 1: Introduction
M&A’s, by which 2 companies are combined to achieve certain strategic and business perspectives,
are transactions of great significance.
Shareholder wealth gains are usually measures by abnormal returns, i.e. returns in excess of an
appropriate benchmark return. Evidence suggests that shareholders of acquirers experience wealth loss
on average, or at best, break even. On the other hand, shareholder of target companies are better off,
with abnormal returns in the order of 20% to over 43%.
From a large sample of studies it is concluded that a high proportion of acquisitions fail to deliver their
objectives. M&A’s more often destroy, rather than enhance value for the acquirer shareholders. Thus,
M&A transactions are high-risk corporate transactions. However, patterns suggest that certain types of
acquisitions are more successful than others; for example in the UK, hostile acquisitions generate
larger wealth gains than friendly mergers.
Five stage model of this book:
1. Corporate strategy development.
Business strategy is concerned with ways of achieving, maintaining or enhancing competitive
advantage in product markets. Corporate strategy is concerned with ways of optimizing the portfolio
of businesses that a firm currently owns, and with how this portfolio can be changed to serve the
interests of the corporation’s stakeholders. M&A can serve the objectives of both corporate and
business strategies.
2. Organizing for acquisitions
One of the major reasons for the observed failure of many acquisitions may be that firms lack the
organizational resources and capabilities for making acquisitions. Thus a precondition for a successful
acquisition is that the firm organizes itself for effective acquisition-making. At this stage the firm lays
down the criteria for potential targets of acquisitions consistent with the strategic objectives and value
creation logic of the firm’s corporate strategy and business model.
3. Deal structuring and negotiation
All the different things that due diligence needs to cover are on page 7. Important to read all this again
before the exam.
4. Post-acquisition integration
At this stage the objective is to put in place a merged organization that can deliver the strategic and
value expectations that drove the merger in the first place. You have to take into account:
Change of the target firm;
Change of the acquiring firm; and
, Change in the attitude and behavior of both to accommodate coexistence or fusion of the two
organizations.
The integration time is also a time of great uncertainty for the managers and the workforce; so, social
processes are at work that may seriously affect the outcome of the M&A.
Also, integration of the merging firms’ information systems (IS) is important. This is particularly
important in mergers that seek to leverage each company’s information on customers, markets or
processes with that of the other company, as in banking and insurance merger.
5. Post-acquisition audit and organizational learning
“Poor acquisitions may be a consequence of governance failure”.
(W1/2) Chapter 2: Historical overview or M&A activity
One of the striking aspects of M&A’s is that they occur in bursts interspersed with relative inactivity.
This is seen in the US for over 100 years, in the UK from the 1960’s and now also in continental
Europe.
In this chapter we first provide evidence of merger waves, and highlight the increasingly global nature
of the waves of the 1980s, the 1990s and the more recent burst of merger waves.
Merger waves at the macro level hide another pattern, namely, industry level waves or clusters.
Wave pattern of the US:
First wave: Merging for monopoly (1890-1905): Approximately 71 important oligopolistic or
near-competitive industries were converted into near monopolies by merger. Horizontal
takeovers: within the same industry/competitors.
Second wave: Merging for oligopoly (1920s): This was a much smaller wave than the first in
terms of relative impact.
Third wave: Merging for growth (1960s): The mergers in this period were not large, and did
not involve large acquirers. They were mostly unrelated mergers aimed at achieving growth
through diversification into new product markets.
Fourth wave: Late 1970s: Merger waves seemed to track the stock market level. Lots of new
developments in the M&A scene hostile tender offers etc.
Fifth wave: 1993-2000: the mother of all waves so far. Firms made acquisitions on the basis of
the need to augment their resources and capabilities in order to enhance their competitive
advantage. This wave saw the emergence of hostile tender offers, to a high degree a return to
corporations’ core businesses., and private equity firm’s LBO’s and MBO’s.
Sixth wave: Into the millennium climaxed in 2007
Wave pattern of EU
The EU member countries have experienced increasing levels of takeover activity since 1984.
Two waves; a small one during 1986-1992 and a bigger one between 1996-2002. These two
waves are parallel to those of the same period in the US.
During the 1990s purely domestic M&A, i.e. transactions involving two or more firms
registered in the same member state, accounted for the bulk of the activity.
Challenges (2010 – Sudarsanam)
(W1/2) Chapter 1: Introduction
M&A’s, by which 2 companies are combined to achieve certain strategic and business perspectives,
are transactions of great significance.
Shareholder wealth gains are usually measures by abnormal returns, i.e. returns in excess of an
appropriate benchmark return. Evidence suggests that shareholders of acquirers experience wealth loss
on average, or at best, break even. On the other hand, shareholder of target companies are better off,
with abnormal returns in the order of 20% to over 43%.
From a large sample of studies it is concluded that a high proportion of acquisitions fail to deliver their
objectives. M&A’s more often destroy, rather than enhance value for the acquirer shareholders. Thus,
M&A transactions are high-risk corporate transactions. However, patterns suggest that certain types of
acquisitions are more successful than others; for example in the UK, hostile acquisitions generate
larger wealth gains than friendly mergers.
Five stage model of this book:
1. Corporate strategy development.
Business strategy is concerned with ways of achieving, maintaining or enhancing competitive
advantage in product markets. Corporate strategy is concerned with ways of optimizing the portfolio
of businesses that a firm currently owns, and with how this portfolio can be changed to serve the
interests of the corporation’s stakeholders. M&A can serve the objectives of both corporate and
business strategies.
2. Organizing for acquisitions
One of the major reasons for the observed failure of many acquisitions may be that firms lack the
organizational resources and capabilities for making acquisitions. Thus a precondition for a successful
acquisition is that the firm organizes itself for effective acquisition-making. At this stage the firm lays
down the criteria for potential targets of acquisitions consistent with the strategic objectives and value
creation logic of the firm’s corporate strategy and business model.
3. Deal structuring and negotiation
All the different things that due diligence needs to cover are on page 7. Important to read all this again
before the exam.
4. Post-acquisition integration
At this stage the objective is to put in place a merged organization that can deliver the strategic and
value expectations that drove the merger in the first place. You have to take into account:
Change of the target firm;
Change of the acquiring firm; and
, Change in the attitude and behavior of both to accommodate coexistence or fusion of the two
organizations.
The integration time is also a time of great uncertainty for the managers and the workforce; so, social
processes are at work that may seriously affect the outcome of the M&A.
Also, integration of the merging firms’ information systems (IS) is important. This is particularly
important in mergers that seek to leverage each company’s information on customers, markets or
processes with that of the other company, as in banking and insurance merger.
5. Post-acquisition audit and organizational learning
“Poor acquisitions may be a consequence of governance failure”.
(W1/2) Chapter 2: Historical overview or M&A activity
One of the striking aspects of M&A’s is that they occur in bursts interspersed with relative inactivity.
This is seen in the US for over 100 years, in the UK from the 1960’s and now also in continental
Europe.
In this chapter we first provide evidence of merger waves, and highlight the increasingly global nature
of the waves of the 1980s, the 1990s and the more recent burst of merger waves.
Merger waves at the macro level hide another pattern, namely, industry level waves or clusters.
Wave pattern of the US:
First wave: Merging for monopoly (1890-1905): Approximately 71 important oligopolistic or
near-competitive industries were converted into near monopolies by merger. Horizontal
takeovers: within the same industry/competitors.
Second wave: Merging for oligopoly (1920s): This was a much smaller wave than the first in
terms of relative impact.
Third wave: Merging for growth (1960s): The mergers in this period were not large, and did
not involve large acquirers. They were mostly unrelated mergers aimed at achieving growth
through diversification into new product markets.
Fourth wave: Late 1970s: Merger waves seemed to track the stock market level. Lots of new
developments in the M&A scene hostile tender offers etc.
Fifth wave: 1993-2000: the mother of all waves so far. Firms made acquisitions on the basis of
the need to augment their resources and capabilities in order to enhance their competitive
advantage. This wave saw the emergence of hostile tender offers, to a high degree a return to
corporations’ core businesses., and private equity firm’s LBO’s and MBO’s.
Sixth wave: Into the millennium climaxed in 2007
Wave pattern of EU
The EU member countries have experienced increasing levels of takeover activity since 1984.
Two waves; a small one during 1986-1992 and a bigger one between 1996-2002. These two
waves are parallel to those of the same period in the US.
During the 1990s purely domestic M&A, i.e. transactions involving two or more firms
registered in the same member state, accounted for the bulk of the activity.
