The Failure of Merger of Equals - Dissertation Example

Download file to see previous pages In terms of efficiency, emphasis is placed on economies of scale or other synergies that may result. Horizontal mergers often refer to economies of scale to be gained; however, economies of scale do not continue to infinity. There is always a point to which they apply, unless more advanced technology can extend it further then diminishing returns is likely may set in.

1.1 Background
In the letter proposing the merger of equals between Xstrata (the bidding company) and Anglo-American (the targeted company) Xstrata (2009a June 17) stated that the combination was being considered for some time and such a merger is a compelling, value-adding proposition for both sets of shareholders while combining a management team that would bring to the table ‘fresh and value-creating opportunities that may not be available otherwise. On June 21, 2009, Xstrata sent out a news release indicating that it notes Anglo-American’s response. Xstrata (2009) argued that the merger of ‘two world-class companies would bring about many benefits. This proposed merger of equals which had no premium attached was expected to create a giant in the mining industry with a market valuation of £40 billion (MacNamara 2009).

Xstrata has grown through a number of acquisitions over the previous five years and wanted to generate economies of scale much like that enjoyed by BHP Billiton and Rio Tinto – which at that time were two of the largest companies in the mining industry. However, Anglo’s CEO Cynthia Carroll indicated that Anglo had superior assets to Xstrata and so the deal had no strategic merit and Anglo would be able to achieve its goals in relation to growth on its own.

1.2 Research Aims
The aim of this research is to determine why Anglo-Americans rejected Xstrata’s merger proposal. It looks at other mergers to determine whether they could have been successful if it was allowed to go through.

The research hypothesis: H0: all mergers are beneficial to both parties
The alternative hypothesis: H1: not all mergers are beneficial

2.0 Literature Review
In order to gain knowledge of what work has been done in this area it is important to review what other researchers have done. This section of the article looks at the reasons that have been given for mergers and acquisitions. It looks at whether mergers are beneficial to both parties (the bidder and the target) and the findings in relation to failed mergers in an attempt to determine the reason for such failures.

2.1 Reasons for mergers
Arnold (2008) indicates that the three main motives for mergers are synergy, bargain buying, managerial motives, and third-party motives. Some of these are similar to Andrade (2001) who looks at economies of scale and synergy, market power, market discipline, and diversification.

2.1.1 Synergies
Operating synergies have been given as one of the primary motives for mergers and acquisitions (Andrade 2001; Mukherjee et al 2004). It is defined as an approach that reinforces the competitiveness of a business by increasing the cash flows that would accrue to both companies independently. The number of expenses that are now paid by both companies would be reduced since only a single payment would be necessary once the companies have merged to become one. They would include audit and accounting fees; fees for advisory services; public relations and stock exchange fees. ...Download file to see next pages Read More