Many theories have been advanced to explain why mergers and
takeovers take place. The operating synergy theory postulates
that economies of scale and/or scope help merging firms to
achieve levels of efficiency in excess of the sum of the combining
parts. Mergers have also been explained as a rapid means for
firms to deal with powerful change forces. Some attribute mergers
to the agency problem of management; managers put their
own priorities above those of the firm. Managers may also be
guilty of hubris, which can cause overpayment.
Mergers face significant challenges. The combination of
organizations is a difficult undertaking. Due diligence is critical.
Firms should use a careful due diligence process to discover not
only legal factors, but also potential cultural and business problems
that may emerge when firms combine. Slow and ineffective
integration has destroyed value in combining firms.
Event studies of merger announcements show that returns
to targets are always positive; the positive returns to targets are
even higher with multiple bidders. Returns to bidders tend to be
around zero and negative with multiple bidders. Event studies
have been shown to be relatively good predictors of subsequent
performance. Industry-adjusted postmerger performance of
merging firms shows that they perform better than nonmerging
firms in their same industries.
Agrawal, Anup, Jeffrey F. Jaffe, and Gershon N. Mandelker, “The Post-Merger
Performance of Acquiring Firms: A Re-examination of an Anomaly,”
Journal of Finance, 47, September 1992, pp. 1605–1621.
Andrade, Gregor, and Erik Stafford, “Investigating the Economic Role of
Mergers,” working paper, August 1999.
Anslinger, Patricia L., and Thomas E. Copeland, “Growth through
Acquisitions: A Fresh Look,” Harvard