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Tuesday, February 8, 2011

Advantages and disadvantages of mergers and acquisitions

Mergers and acquisitions
Mergers and acquisitions help propel business growth strategy
Advantages and disadvantages of mergers and acquisitions (M&A) are determined by the short-term and long-term company strategic outlook of the new and acquiring companies. This is due to a host of factors including market conditions, differences in business culture, acquisition costs and changes to financial strength surrounding the corporate takeover.

A well known example of mergers gone bad was the September 15, 2008 merger between Bank of America and Merrill Lynch. This merger was surrounded by complications ranging from employee bonuses, added debt and forced hands as evident in the April 13, 2009 U.S. Senate Committee on Banking investigation of the merger. (7)

In the case where short-term financial benefits are not realized, long-term advantages may be seen as a valid and probable reason for the merger or acquisition. This article will discuss advantages and disadvantages of mergers and acquisitions in four parts consisting of pros and cons of M&A decision making, operational and financial advantages, costs, and consumer benefits and drawbacks.

Pros and cons of mergers and acquisitions

A number of reasons provide sanction for a corporate merger and acquisition, not all of which are necessarily financial in nature. Moreover, M&A is within the scope of the Board of Directors to pursue (1) and the company executives to initiate and execute. Since board members may also be subject to political, social, and personal interests, decisions seemingly in favor of the shareholders may also become quagmired with additional factors.

According to Investopedia.com, an estimated 66% of mergers and acquisitions are not successful because of M&A intent. Of the 33% that are considered successful, the mergers and acquisitions achieved a net gain from the M&A with our without misguided M&A intent. A number of reasons for the majority of failures exist in addition to the failures themselves indicating a potential disadvantage of M&A activity is a relatively high risk of overoptimism about financial results.

This is further illustrated in an article from a 2005 article in the Journal of Global Business on M&A preparation. (6) Moreover, the article that refers to numerous M&A case studies and research sources states the reasons for M&A shortcomings include poor basis for decision making on the part of the company leadership,  failure to consider and/or incorporate the new company, weak transitional management and overestimating the valuation of the acquired corporation.

Despite the reasons some M&A's fail, mergers and acquisitions, regulations of such and their circumstances may harness the characteristics of the decision makers for the net economic advantage despite possible conflicts of interest, short-term financial and consumer disadvantages. In other words, in theory, mergers and acquisitions may be economically beneficial in terms of reducing complexity of regulatory oversight, increasing global corporate competitiveness, and adding to shareholders net wroth. This is verified by the M&A activity that is successful through increases in equity valuations, larger market share, improved operational efficiency, higher industrial capacity etc.

Operational and financial advantages of mergers and acquisitions

The operational and financial advantages of mergers and acquisitions are widely documented and may also present the face of M&A activity to shareholders, the public, corporate appeals to legislators etc. These advantages can include increased market share, lower cost of production, higher competitiveness, acquired research and development know how and patents. These and other advantages (2) of M&A are listed below:

• Increased market share
• Lower cost of operation and/or production
• Higher competitiveness
• Industry know how and positioning
• Financial leverage
• Improved profitability and EPS

Not all the above advantages of mergers and acquisitions may be realized, but are often included among the reasons for engaging in the corporate activity. When a company is able to benefit from all these advantages it can lead to more stability as a corporate entity and cold also provide for higher political influence and industry leadership.

Costs of mergers and acquisitions

Mergers and acquisitions can be costly due to the high legal expenses, and the cost of acquiring a new company that may not be profitable in the short run. This is why a merger or acquisition may be more of strategic corporate decision than a tactical maneuver. Moreover, if a poison pill unknowingly emerges after a sudden acquisition of another company's shares, this could render the acquisition approach very expensive and/or redundant. (4)

• Legal expenses
• Short-term opportunity cost
• Cost of takeover
• Potential devaluation of equity
• Intangible costs

M&A activity can also be exacerbated by the short-term cost of opportunity or opportunity cost. This is the cost incurred when the same amount of investment could be placed elsewhere for a higher financial return. Sometimes this cost does not prevent or deter the merger or acquisition because projected long-term financial benefits outweigh that of the short-term cost.

Consumer and shareholder drawbacks

In some cases, mergers and acquisitions may not only disadvantage the shareholders but consumers as well. In both cases, this may happen when the newly formed company becomes a large oligopoly or monopoly. Moreover, when higher pricing power emerges from reduced competition, consumers may be financially disadvantaged. Some of the potential disadvantages facing consumers in regard to mergers are the following. (3)

• Increase in cost to consumers
• Decreased corporate performance and/or services
• Potentially lowered industry innovation
• Suppression of competing businesses
• Decline in equity pricing and investment value

Shareholders may also be disadvantaged by corporate leadership if it becomes too content or complacent with its market positioning. In other words, when M&A activity reduces industry competition and produces a powerful and influential corporate entity, that company may suffer from non-competitive stimulus and lowered share prices. Lower share prices and equity valuations may also arise from the merger itself being a short-term disadvantage to the company.

The slideshow below further elaborates the mergers and acquisitions process:


1. http://www.nvca.org/index.php?option=com_docman&task=doc_download&gid=368&Itemid=93
2. http://www.economicshelp.org/microessays/competition/benefits-mergers.html
3. http://www.economicshelp.org/microessays/competition/uk-mergers.html
4. http://www.investopedia.com/university/mergers/mergers5.asp
5. http://legal-dictionary.thefreedictionary.com/Mergers+and+Acquisitions
6. http://www.gbata.com/docs/jgbat/v1n2/v1n2p1.pdf
7. http://www.oag.state.ny.us/media_center/2009/apr/pdfs/BofAmergLetter.pdf

8. Jarrod McDonald, Max Coulhard, and Paul De Lange.(Fall, 2005) 'Planning for a Successful Merger: A Lesson form an Australian Case Study.' Journal of Global Business and Technology, Volume 1, Number 2.

1 comment:

  1. Mergers and acquisitions mean the process of one company buying another company and mixing the two together. M&As are risky and complex transactions that can impact your investors, efficiency, and popularity. However, it is a highly effective device for speeding up development if the appropriate due persistence is done. Every company and every merging is exclusive but no matter what market you are engaged in there are some key techniques for a effective integration.

    There are many advantages and disadvantages of mergers and acquisitions and they are identified by the long and short lasting ideal perspective of the new and obtaining organizations. Some of the aspects may consist of market circumstances, variations in business culture, acquisition costs, and changes to financial durability around the corporate takeover.

    Mergers and Acquisitions