Shareholder Wealth Case Study

Mergers and Acquisitions and Shareholder Wealth:

The theory of finance states that maximization of shareholder wealth should be the goal of every business organization. It is not clear, however, whether maximization of shareholder wealth is the main motivation behind Mergers and acquisitions. This has generated a lot of research interest the area. Unfortunately decades of intensive research have not been able to conclusively establish the impact of Mergers and acquisitions on shareholder wealth. in a comprehensive article reviewing the empirical work presented in over forty papers concluded that the evidence indicates that corporate takeovers generate positive gains, that target firm shareholders benefit, and that bidding firm shareholders

One explanation appeals to be behavioral traits; the managers acquiring firms may be driven by overconfidence in their ability to run the target firm better than its existing management. This may well be so, but we should not dismiss more charitable explanations. For example, Firms can enter a market either by building a new plant or by buying existing business. If the market is not growing, it makes more sense for the firm to expand by acquisition. Hence, when it announces the acquisition, firm value may drop simply because investors conclude that the market is no longer growing. The acquisition in this case does not destroy value; it just signals the stagnant state of the market.

Why do sellers earn higher return?

Buying firms are typically larger than selling firms. In many mergers there are so much larger that even substantial net benefits would not show up clearly in the buyer’s share price. Suppose, for example that company A buys company B which is only one-tenth of A’s size. Suppose the dollar value of the net gain from the merger is split equally between company A and B. Each company’s shareholders receive the same dollar profit but B receives 10 times A’s percentage

With some plant retirements expected, “we’re going to have to replace those with something and of course nuclear is an option that is more feasible for a company this size.”

Conclusion:

Although mergers and acquisitions are used as ways for fast growth for a company however, given the aforementioned unsuccessful examples they may turn out to be a lethal experience.

Thus, a complete and thorough analysis of factors such as economies of scale, complementary resources, Industry Consolidation, growth etc. has to be conducted in order to at least account for the accompanied risks that come with such a process.

On the other side of the fence, a well analyzed study of mergers or acquisitions before actually stepping into the process may seriously pay off and lead to a very successful and smooth experience for both companies and can result in a lot of rewarding financial, cultural and social benefits for the involved