Mergers and acquisitions are such modes of growth. Mergers occur when two firms of equal standing concur to combine their operations under one shareholder group; acquisition is when one firm outrightly purchases another and becomes its majority shareholder. As to whether they combine operations or not and the manner they choose to do so are a matter of strategic determination, but it does not detract from the fact of the merger or acquisition as a matter of ownership (Daniel & Metcalf, 2001, p. 216). This report examines the fundamental theories behind mergers and acquisitions and gives a cursory examine of one such undertaking.
Motives for firms to enter into mergers or acquisitions:
(1) To improve efficiencies by reducing production costs, increasing output, improving product quality, obtaining new technologies, or providing entirely new products. A merger or acquisition may explore both operating and managerial efficiencies. Operating efficiencies come from economies of scale, production and/or consumption economies of scope, enhanced resource allocation, shift to a less costly technology or asset configuration, or acquisition of better skills, use of grand name capital, and so forth (Pautler, 2003, p.122). (2) To explore financial and tax benefits by diversifying the firms’ earnings with dissimilar earnings streams to lessen earnings variation. Depending upon regulations, tax benefits may be realized, as in situations where the law allows offsetting the acquiring firm’s taxable income with the acquired firm’s net operating losses to reduce future taxes (Pautler, 2003, p. 122) (3) To increase market power to the advantage of the merging firms. Where the merging firms each command a significantly sizeable part of the market, then their merger may well trigger a spate of other mergers by the competing firms, which result in virtual monopolies or oligopolies. These so-called “merger waves” were evident in three periods: the successive mergers in the 1887-1904 wave which were viewed by George Stigler as “mergers for monopoly,” the 1916-1929 wave he called “mergers for oligopoly,” and the 1968-1974 wave which Matsusaka termed the “conglomerate merger wave” (Stigler, 1950, and Matsusaka, 1993, both cited in Pautler, 2003, p. 125). After the passage of the antimerger legislation in the U.S. in 1950, preventing the merger of competitors with significant market shares, such mergers were allowed only after review and approval by U.S. antitrust and other regulatory agencies. In the UK, a similar merger wave was seen between 1948 and 1961, when 735 public companies were taken over by other public companies, with two to three hundred other unsuccessful bids during the period, which Kuehn (1969) attributed to the effect of the valuation ratio as a constraint on the managerial utility function (p. 133). (4) Because of management greed, self-aggrandizement or hubris. A study conducted by Morck, Shleifer & Vishny (1990) showed that managerial incentives may account for merger activity that eventually erode the firm’s long-term value. Badly considered mergers may result in over-diversification, an ill-considered pursuit of growth, or merely bad acquisition decision. Oftentimes, the poor quality of the decision is not evident at the time it was made, and only becomes apparent afterwards. Matsusaka found that in the conglomerate merge