Types of Mergers and Rationale for each
Vertical - Combinations between firms at different stages
Goal is information and transaction efficiency
Horizontal - Economies of scale and scope
Synergies (ex. combining of best practices)
Conglomerate - list Dunning’s motives for FDI without mentioning FDI
Change forces driving mergers
Technological change
Efficiency of operations
Globalization and freer trade
Changes in industry organization
New industries
Deregulation and regulation
Favorable economic and financial conditions
Negative trends in industries and economies
Widening inequalities in income and wealth
High valuation of equities (1990s)
Reasons Against Mergers
No improvements subsequent to the acquisition
Redistribution of wealth from labor and other stakeholders to shareholders
Speculative activity
Reasons For Mergers
Critical to healthy expansion of business firms
Increase value and efficiency
Move resources to optimal uses
Value Enhancing Theory of Mergers
- Reduction in Transaction Costs
- Syngergies
- Remove poor management and streamline processes
Value Reducing Theory of Mergers
- Agency cost of free cash flow
- Managerial entrenchment
Value Neutral Theory of Mergers
- Overconfident managers
- Winners curse
Empirical Evidence on combined returns
- Bulk of evidence suggests mergers have positive combined returns
- Bradley, Kaplan, Andrade all diff authors which show different levels of positive combined returns (from 1.8%-7.4%) throughout late 80s to ealy 00s
- Cash deals return most profits for both target and acquirer
- Berkovitch shows there is correlation between target and bidder return, due to synergies
- Multiple bidder attracts more positive returns
