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Empirical Finance: The Failure of Merger of Equals - Dissertation Example

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Empirical Finance: The Failure of Merger of Equals

Some of the reasons given for mergers relate to efficiency, market power, market discipline, expansion of operations and diversification (Andrade 2001). 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 American rejected Xstrata’s merger proposal. It looks at other mergers to determine whether it 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 motive for mergers and acquisitions (Andrade 2001; Mukherjee et al 2004). It is defined as an approach which reinforces the competitiveness of a business by increasing the cash flows that would accrue to both companies independently. A 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 ...Show more


The Failure of Merger of Equals Course: Name: Date: Abstract This research looks at the merger proposal made by Xstrata to Anglo American. The proposal was rejected as unacceptable. The article looks at some reasons for mergers and causes of failures. The aim of the study was to determine if t would have been successful had it been allowed to go through…
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Empirical Finance: The Failure of Merger of Equals
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