Classical Theories Of Mergers

Acquisition and mergers

1-1Mergers & Acquisitions overview

Throughout the last century five waves of major M&A activity has occurred (Bruner, 2004 &Gregoriou et al., 2007), which has been motivated by large changes in macroeconomic factors (Bruner, 2004). When evaluating the five historical waves it can be obtained that similar and often equal macroeconomic factors have been the reason for many of the waves. In this part of the research the five historical waves of M&A activity will be described.

In the 1890s the first observed wave of M&A activity occurred. It is believed to have been generated by an economic depression, legislation governing incorporation, and the development of trading in industrial securities on the New York Stock Exchange

The theories with respect to mergers and acquisitions can majorly be categorized into two groups of neoclassical theories and behavioral theories. Neoclassical theory is based on the assumption that managers are rational and make rational choices to maximize the wealth for the shareholders whereas behavioral theory focuses on the assumption that managers are not rational and they do not represent the interests of the shareholders. These theories can be further categorized into external and internal motives. Internal factors, for instance, agency costs or synergy can be directly influenced by the management whereas the external motives such as globalization or technology cannot be influenced by the management. Cost cutting, revenue enhancement and risk reduction are the possible factors that explain successful acquisitions with cost cutting being the most important factor for the pharmaceutical companies worldwide. Mukherjreem et al. (2004)2 stated that primary motivation for Mergers and Acquisitions is to achieve operating synergies. Their results depicted that most of the firms believe that diversification is a justified motive for acquisitions as a means of reduction in losses when there are economic downturns. According to Sharma (2009), economies of scale are one of the main arguments behind Mergers and Acquisitions. The implication is that pharmaceutical companies get involved in M&As to cut down the operating costs by reducing the branch networks and staff overheads and also by integration of information technology and risk management systems. Increased competition provides an incentive for pharmaceutical companies to grow to take advantage of the large capital base and market power. Author further stated that geographical expansion might act as a defensive mechanism for pharmaceutical companies planning to withstand external pressures arising from