Last November, I finished my Master Thesis on mergers & acquisitions and the effects they have on the shareholder wealth. Although I am doing a Master in Finance, this topic also has strategic roots. In 2008 Asset | Strategy & Logistics organized a symposium on this topic, questioning whether the size of firms has an effect on the results of these transactions. In this article I will try to bridge the gap between finance and strategic management on this topic.
The cross-section of finance and strategic management related to this topic, happens already at the reason of why these transactions exist. The main motive for mergers and acquisitions, namely, is often the expected synergies they have. The synergies are divided into two main categories, which are operating synergies and financial synergies. With operating synergies you can think of, for example, economies of scale and economies of scope. An example of a financial synergy effect is a lower bankruptcy cost.
These things make it worth to put effort and time in these complex transactions, because they could cause an increase in value.
However, research over the past decades has shown that these synergy effects are not always realized, as was shown by research done for the US. In the most recent M&A peak moments (1993 – 2001 and 2003 – 2007), it was concluded that acquiring firms tend to lose value following mergers and acquisitions. Looking back at the topic of the symposium of Asset | Strategy & Logistics, research is also conclusive that larger firms tend to destroy more value than small firms. A reason that has been put forward is the fact that larger firms have more cash available and therefore can pay higher premiums, which may be too high. Furthermore, it may be the case that managers of bigger firms are more overconfident than those of smaller firms, and destroy more firm value because of empire building.
Another question is whether cross border transactions have an effect, which impacts the returns for shareholders. I think this also is a question students studying Strategic Management deal with, which could have different results, depending on the topic of research. Questions like “Would it help to expand our customer base by diversifying abroad?” and “Would we earn higher returns in country X, because of the low competition?” are easily thought of. Looking at mergers and acquisitions, this variable seems to have a negative impact on wealth, probably caused by cultural differences. Also the question which means of payment to use is an interesting one for both students in finance and strategic management, but here I will stop, before I will spoil everything there is to read on this topic.
In comparison to the before mentioned research, research for Europe concluded on positive abnormal returns in the 1993-2001 period. I myself, also found similar results for 2003-2007 in Western Europe. It seems as if countries in Western Europe still believe in the positive effects of synergies, maybe more than the US does. I also believe in this effect, and was happy to find the results I found. Currently I am doing a board year and here I am trying my best to convince others of the positive effects of synergies. Moreover, I am trying to realize the effects as well and I already see the results!
I have tried to bridge the gap a bit between finance and strategic management. Although this is only one topic in finance, there are more research topics that are fitted for both studies and will probably interest students from both masters. Of course, both study areas are much broader, containing lots of other subjects, but hopefully you see that the link is not as hard as one would expect!
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