The Value of Mergers to Shareholders

The Value of Mergers to Shareholders


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 companies is negative or positive is quite controversial and is dependent on a number of factors; some that are external in nature. The decision on whether mergers result in the creation of wealth or the decrease of the same is therefore not a straightforward decision (Lemon, 2007). While some studies have concentrated on the accounting aspects of the merger process, others have focused on the financial stability of the companies. Some of the studies have demonstrated a resultant improvement in profitability of the merged organizations with others showing the exact opposite scenario of poor performance. Financial studies on the performance of mergers however, portray the performance of these businesses in relation to the price of their shares after the merger process. Results from these studies have shown that mergers result in significant abnormal returns to shareholders of the target firm with those from the acquiring firm having no or even negative results (Ghosh, 2011). However, the acquiring shareholders have been reported to benefit from mergers in the long run through numerous benefits that are associated with the merging process.

Regardless of the method used in analyzing the potential of mergers to create shareholder wealth, it is evident that the results are mixed. Both accounting and stock based studies have conflicting results regarding the performance of the target and bidder companies after the mergers (Campa & Hernando, 2014). Both studies portray instances where the merging process results in a positive creation of shareholder value with others showing similar but negative effects on the companies involved. Ultimately, therefore, there is no single study that can claim authority in deciding whether mergers result in positive or negative shareholder wealth creation. Indeed, the results of the merger process are largely dependent on the implementation and success of the merger process with respect to the management of the same (Campa & Hernando, 2014). Despite the conflicting results, most of the studies are inclined towards the notion that mergers do not result in the creation of shareholder value. However, the nature of the studies is in itself a source of doubt since most of the studies are conducted over a very short duration. Evidently, mergers will result in low shareholder value immediately after the process but the stock prices are bound to increase over a period of time. This is a basic fact that is normally overlooked in the development of hypothesis and the consequential conclusion of the findings in the studies.

Case Study

The case of AT&T merging with Bell South Corporation is a perfect example of the success of the merger process. The process was undertaken in 2007 at a total consideration of $72 billion and is cited as one of the largest mergers of modern times (Lemon, 2007). Indeed, AT&T is a giant telecommunications company with an accumulated net worth surpassing billions of dollars. Ion understanding whether mergers result in increased value for the shareholders, it is important to analyze the performance of the company before, during and after the merger process. This is done with a focus on the period leading to two years before the merger and four years after the conclusion of the merger process. The objectives of the merger included the widening of the company’s market share as well as increased sales. Moreover, the managers anticipated a substantial reduction in costs for the enlarged company due to the incidence of economies of scale. Consequently, therefore, the high expectations within the management of the company point to a high confidence in the process. Evidently, the success of the merger was expected to lead to higher value creation for the shareholders through higher stock prices as well as increased profitability.

The benefits of having mergers are immense to the shareholders and are almost not quantifiable in the long run. A large part of the main sources of benefits result from the objectives pursued by the management of the acquiring company. Although most of the mergers are unsuccessful, the anticipated projections in value and wealth are too good to be assumed. Ultimately, it is the realization of these projections that results in the creation of shareholder wealth through such routes as the increase in profitability and stock price. The projections of AT&T were so high that they expected the costs to be saved by up to $2 billion in the two years following the conclusion of the merger (Lemon, 2007). Most of the cost saving would be achieved through reduced operational costs as well as the consolidation of facilities. In addition, the combination of the operations within the IT departments of the two companies was anticipated to result in cost reductions and an eventual increase in profitability. Consequently, the attainment of these steps resulted in the creation of shareholder value through increase profitability.

Increased earnings per share are also other ways through which the value of shareholders is enhanced following a successful merger (Ghosh, 2011). In the case study of AT&T, earnings per share were expected to grow in double digits in the three years following the conclusion of the merger process. While such projections could be overruled for their over-ambitiousness, it is their realization that spells good tidings for the shareholders. Indeed, the high projections were based on practical case studies thus portraying the potential of such strategies in sustaining shareholder value. Even where shareholder value has not been achieved following a merger, it is only for the short duration during and immediately after the conclusion of the mergers. Moreover, most of the shareholders recorded increased earnings from their shareholding in the companies although not in the pattern projected in the AT&T case study. Also, the lack of shareholder value maturity is sometimes based externalities that are beyond the control of the company. Some of the failures witnessed in the industry concerning mergers are largely attributed to the entry of external forces such as the hiking of share prices in anticipation of the merger process.

The floating of mergers in the industry guarantees gains for shareholders of the target and bidder company in terms of their value in the company. One of the main sources of this gain is recorded through the increase in revenue that eventually translates into equity and share earnings for the shareholders. For instance, the AT&T Company revised its 2007 revenue forecast upward in anticipation of the merger deal with Bell South Corporation. In truth, the projections of the company were partially met as evidenced by the doubling of sales revenue period between 20001 and 2010. This bracket of period covers the time before and after the conclusion of the merger. In showing the financial status of the company just before the merger, the paper aims to ascertain that the company was in a stable financial position, something that continued in the years following the merger. In addition, the period before the merger witnessed a drop in sales revenue from $43 billion in 2001 to $38 billion in 2005 (Lemon, 2007). However, the period after the merger realized an increase in sales revenue from $55 billion in 2006 to more than $110 billion in 2010. These figures portray the influence of the merger in increasing the sales revenue of the company immediately after the merger process. The impact of the merger was therefore positive in terms of revenue generation and eventual profitability.

The AT&T merger had the objective of reducing the company’s operational costs within the three years following the conclusion of the merger. This objective is one of the pointers of the sustenance of shareholder value since its achievement meant higher profitability for the company. Statistics on the performance of the company reveal a similar trend as that of sales revenue which is somewhat not healthy. The period between 2001 and 2010 reveal that the operating costs of the company doubled from $33 billion to way over $95 billion. However, the increase in operating costs is unique for the period after the merger but was a continuation of increased operational costs over the period. In fact, the increase in operating costs after the merger was better off than the increase before the merger. Before the merge, sales were declining thus straining the increase in operating costs further. Therefore, the increase in operating costs after the merger cannot be compared with the increase before the merger.

Although the increase in operating costs can be attributed to negative growth of the business, it does not instantly reflect a failure on the part of the business (Bild & Guest, 2012). In the period after the merger, the operating costs increased from 45 billion in 2006 to $96 billion in 2010. Evidently, the merger resulted in an increase in operating costs contrary to the anticipated decline. Nonetheless, the increase in operating costs cannot be used in concluding a failure on the part of business since it was offset by increased sales during the same period. In view of the same, the increased costs of operations are justified by the corresponding increase in sales revenue during the period after the merger. It can be assumed therefore that the costs of operating the business increased due to increased sales in the business. In fact, the operating income after the merger increased from $10 billion in 2006 to $18 billion in 2007. However, the operating costs have continued on a gradual decrease since 2007 reflecting the long term importance of mergers in reducing operating costs. The case study of AT&T is a true manifestation of the role of mergers in reducing the cost of operations within the business and the corresponding increase in sales.

The case study of AT&T and its merger with Bell South Corporation reflect the increasing role of mergers in improving a company’s profitability. Although the operating costs have not returned to the levels below the period before the merger, the reduction in the costs is significantly high. Consequently, the company has witnessed a gradual reduction in the operating costs as well as an increase in the sales revenue translating to increased profitability. In great detail, therefore, the company’s objective of reducing the operating costs was achieved by increasing the number of sales and therefore reducing the cost per unit of production. Moreover, the reported increase in operating income reflects an attainment of the company’s objective. Ultimately, the attainment of the company’s objective can only mean an increase in the value of shareholders since the same translates to increased profitability. Normally, increased profitability has the net effect of increasing the share price to the advantage of the shareholders (Campa & Hernando, 2014).

In addition to the gains discussed herewith, the company further benefitted from increased net profit margin after the merger. Indeed, the net profit margin is one of the key determinants of the performance of a company and is used in the financial analysis. Although the increase was relatively small, it translates to a positive factor in the performance of the company. In the period between 2001 and 2008, there was a decrease in the net profit margin which can be attributed to the international financial crisis. In fact, 2008 was worst hit with net profit margins of -2.1%. However, the period from 2008 to 2010 witnessed a gradual increase to 15.4%; a figure that has continued to increase over the years. The increase in net profit margin for AT&T in the period can be attributed to the effect of the merger. In fact, the decline in the years between 2006 and 2008 cannot be attributed to the non performance of eth merger but is resulting from the externalities witnessed in the world. Evidently, the merger resulted in increased value for the shareholders in view of the parameters analyzed.


In the end, the merger involving AT&T resulted in the increase of shareholder wealth and value over the period. In fact, an analysis of similar companies that were in the same industry and did not merger paints a better picture of the value created by AT&T. In addition, companies such as Verizon communication were more volatile compared to AT&T in terms of shareholder value increase. Comparatively, Verizon Communications does not show the growth witnessed in AT&T during the period after the merger. Consequently, therefore, a large portion of the improvement at AT&T can be attributed to its merger with South Bell Corporation. It can be concluded that the company created significant value for its shareholders through the merger by increasing its revenue, sustaining high operating income and reducing the operating costs.



Campa, J.M. and Hernando, I.(2014). Shareholder value creation in European M&A. European Financial Management, 10, 47–81.

Ghosh, A. (2011). Does operating performance really improve following corporate acquisitions? Journal of Corporate Finance, 7, 151–178.

Lemon, S.(2007) AT&T to buy BellSouth in $67 billion deal, Deal is expected to close within the next 12 months, available online at: [accessed: 13th December 2011].

Andrade, G. Mitchell, M. andStafford, E. (2011) ‘New evidence and perspectives on acquisitions’, Journal of Economic Perspectives, vol. 15, pp. 103-120.

Bild, M., Guest, P. (2012), “Do Takeovers Create Value? A Residual Income Approach on U.K Data, ESRC Centre for Business Research, University ofCambridge Working Paper No. 252


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