The last 40 years have witnessed several merger waves and the size of total merger and...

The last 40 years have witnessed several merger waves and the size of total merger and acquisition transactions total more than $1 trillion. Yet, the biding firm fails to benefit from the takeover activities. Using the context of managerial interest for engaging in merger activities explain why takeover fails to create value for bidding firm.

Expert Solution

Mergers and acquisitions are often done to achieve inorganic growth. It is worth noting that most of the top management's compensation (especially that of CEOs) is linked to growth achieved within a certain timeline. Achieving growth either in terms of market-share, revenue or profitability through organic route can not only be time consuming but uncertain too. However, acquisition (or merger) of an already existing business could seemingly appear as a low hanging fruit to fulfill these targets.

A major advantage of M&A activities to the bidding firm is that the balance-sheet and P&L autmotically gets a boost post completion of the M&A. This is because the financials of the acquired firm gets consolidated with the acquiring firm. Thus, from a financial reporting perspective, the organization has achieved growth. Since, the compensation and bonuses of top executives are linked to growth in revenues/profitability/balance-sheet metrics, M&A activities serve their purpose.

However, the true value addition through an M&A activity is only realized when there is an incremental growth in terms of market share, costs savings or profitability after combining the entities - this is commonly called as synergy. More often than not, before the closure of the transactions, these companies assume significant amount of synergies in their financial model, however, the concerned parties fail to recognize various qualitative factors in question. In reality, it is very difficult to achieve the projected scenarios due to various practical difficulties.

Most of the M&A transactions have failed in the past due to difference in corporate culture of the organizations. Integrating systems and people can be extremely time consuming, and yet success is not guaranteed.

Thus, aligning the compensation of executives with long-term achievement of goals of the organizatoin is important.

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