Why Mergers and Acquisitions? Underneath the Paradox

It’s well-known that M & As are distinguished by a paradox: on one side study demonstrates that more than 50percent of the transactions don’t provide value. But, notwithstanding this bad history, the M & phenomenon has been steadily rising over the past 20 years, together with indications of minor reduction only during the new fiscal downturn.

Why M & As are these a favorite instrument, even if the vast majority of these deals become be a bitter disappointment? Basically we could identify three reasons:

1. Individual motives: in some instances leading executives of a business prefer to pursue private interests and proceed with a merger or an acquisition, even if it’s clear from the beginning it isn’t likely to be prosperous. By following the deal they’ll be able of handling a much bigger organization and boost their standing and matches their self. In addition, it’s not abnormal due to their bonuses to be connected to the dimensions of their organization. Therefore, going forward with the deal is a win-win choice for these, even if it doesn’t produce value for the shareholders. True, in some instances leading executives might lose their occupation as a result of a failed M & A, however, the hubris hypothesis frequently plays a big part: the best executive is certain that s / he gets the capability to conquer the challenges of this bargain even if the odds are considerably low.

2. Industry motives: in some instances leading executives opt to proceed with M & As due to industry limitations or challenges like globalization, increased competition or and industry consolidation. This strategy is quite common in sectors like utilities and automotive in which vertical mergers are a tool used to combine the industry.

3. Organizational motives: they are connected primarily to the openness to make value and to achieve synergies – eg cost reduction, economies of scale, knowledge acquisition (the latter is quite common with respect to commence ups in the tech industry ).

These reasons explain why leading executives take the battle on board and proceed with M & As. Neverheless we must check out the fact that a number of deals do reach synergies and do generate additional value: whilst on both sides over the decades we’ve seen trades from hell such as the devastating AOL and Time Warner or the Daimier Benz and Chrysler, on the other there are mergers and acquisitions which were extremely powerful and rewarding, including Disney and Pixar or even JP Morgan and Chase.

The”secret recipe” unites several components, such as careful strategic planning, comprehensive due diligence between not just the legal and finance departments but also functional branches such as IT and HR. Deficiency of concern relating to the cultural differences and neglecting the individual factor of this trade (eg differences in labour law, retention strategies for key individuals, proactively handling resistance to change) are deal killers. It’s also important to acquire the involvement of senior executives not just when searching for the goal and negotiating the price tag, but also throughout the integration period. It’s not simple, but not impossible.

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