Question

Based on several studies, between 60% to 80% of corporate mergers decrease the wealth of the acquiring firm's shareholders(or increase wealth less than non-merging companies). What could account for this dismal record.

Answer 1

Merger

A merger is defined as an agreement between two existing companies to unite into a single combined entity. Companies engage in this activity to create shareholder value by increasing market share or by foraying into new business segments.

Impact of Merger on Shareholders

The Merger and Acquisition will affect the shareholders of both the companies that are going to merger. In acquisition the acquired firm shareholders will get the most benefits then the acquiring firm because usually the acquiring firm pays a little extra than it is supposes to pay.

Due to Merger, the share price of both underlying companies are differently impacted, based on a host of factors, such as macroeconomic conditions, market capitalizations, as well as the execution of the merger process itself. But generally speaking, shareholders of the acquiring firm usually experience a temporary drop in share value

The shareholders of both companies may experience a dilution of voting power due to the increased number of shares released during the merger process.Shareholders of the acquiring company experience a marginal loss of voting power, while shareholders of a smaller target company may see a significant erosion of their voting powers in the relatively larger pool of stakeholders.

Conclusion

Mergers & Acqusitions destroy shareholder wealth in the acquiring companies.New Research from NBER shows that, over the past 20 years, U.S. takeovers have led to losses of more than $200 billion for shareholders. However, this result is dominated by the big losses experienced by shareholders in big companies. Small companies that make acquisitions create value for their shareholders.