Question

Explain the 2 reasons why mergers and acquisitions can become a winner’s curse.

Answer 1

Ans: Winner curse in relation to merger & acquisition refers to winning a bid by paying more than the value of firm which ultimately leads to winner at worse position.

Reason for winner curse is as follows:

1. Incorrect estimation of benifits: When the person bidding for acquisition estimate the value of asset of the firm more than actual value of the assets e.g. Firm estimates that afte racquiring the another firm it would result into sysnergy benifit which leads to save cost by $ 2 lacs & also increase the market share which would result increase in profit by $10 Lacs. So the bidder estimate it could pay   up to $ 12 lacs due the above mentioned benifits. But when he acquires the firm, due to technological & demographical reasons the assets of the aquired firm would only give benifit of $ 5 lacs. In this scenario if bidder paid $ 10 lacs to acquire the firm then it would lead to loss of $ 5 Lacs.

2. Emotional reason: Some time bidders bid higher than the value of asset due to unconrollable desire to win the auction at any price which ultimately results in submission of higher bids .