The Value of Mergers to Shareholders

The Value of Mergers to Shareholders

Introduction

In today’s world, mergers and acquisitions have gained prominence due to their ability to enhance economies of scale. Consequently, many large companies have in the past used mergers to increase their value in the relevant industries as well as increasing their customer base. The topic of mergers and their ability to increase shareholder value is however not a straight forward ordeal. Rather, the ability of these business strategies in creating and raising the value of shareholders is a topic that continues to spark debate and controversy. Indeed, the academia field has been most active in this endeavor with the emergence of several papers analyzing the feasibility of the strategy in business. While the results are clear in terms if the acquired companies, it is not clear whether the acquiring companies gain any value. Different researchers have floated different results on the same concept with most of the studies having no clear conclusions. Essentially, therefore, the success of mergers in increasing the shareholder value is dependent on the effectiveness of the implementation process (Andarde et al, 2011). Nevertheless, have the potential of increasing shareholder value in the resulting organizations.

Often, proponents of mergers cite synergy gains through improvements in a company’s operations in justifying the need for mergers. However, these gains are only noticeable in the long term with the opposite effects being realized in the short term period. In truth, it might take more than three years for an organization to realize the benefits of synergy resulting from mergers. It has been argued that the resulting firm can have benefits resulting from economies of scale and scope. Indeed, these benefits have the net effect of improving cash flow through reduced capital investments as well as lower operating costs. Normally, reductions in operating costs result in high profitability for the company and the resulting increase in shareholder value in the long term. However, these benefits are rarely realized because more than half of mergers are unsuccessful. Ultimately, the benefits cited herewith are mostly realized in theory with minimal instances of practical benefits in the business field. Nonetheless, shareholders usually stand to improve their value in the company whenever their company merges with another company.

Literature Review

A merger is absorption of a firm by another firm resulting in the dissolution of the acquired firm and the continued existence of the acquiring firm. The growing rise in the number of mergers in the world is a positive sign to the importance and success of mergers in the business world (Ghosh, 2011). Indeed, the value of mergers in the world has maintained a significant percentage of the global gross domestic product. In addition, the high interest in the study of post merger performance of businesses is a pointer to the increasing trend of mergers in business sustainability today (Bild & Guest, 2012). Most of the researchers have been in agreement regarding the creation of wealth for the shareholders in mergers. However, the researchers also agree that the value created is not evenly distributed among the two sets of shareholders. Shareholders of the target firm realize increases in their shareholding value when their stock is purchased by another company. However, when the merger is financed through stock where these shareholders are given stock in the resulting company, their shareholder value may either decrease or have no effect (Andrade et al, 2011). Similarly, shareholders in the acquiring firm have negative impacts or no impacts on their wealth in the company.

Studies in the past have found mergers to be a guaranteed way of destroying shareholder value in acquiring firm. However, these results have not discontinued the trend of mergers in increasing market share and diversification into other industries (Bild & Guest, 2012). Despite the results of studies showing negative impacts on shareholder value, they only apply to the three year period following the merger announcement. Moreover, results from similar studies point out to the fact that successful merger deals result in creation of more wealth that that destroyed by unsuccessful deals. Consequently, the share price value of the acquirers is positive despite more than 50% of the mergers being unsuccessful in creating value (Ghosh, 2011). However, even the short term period results in value creation especially during the run up to a merger. This increase in value is reflected in the increase in the share prices of the acquirers to values above the market index.

The debate on whether the post merger performance of acquiring com

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