Corporate Acquisitions and Shareholder Value

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Table of Contents

Introduction
Analysis
References

Introduction

A corporate acquisition is a transaction involving the purchase of one company, known as the target company, by another company, known as the acquiring company (Gitman & Zutter, 2012). Acquisitions may be of two types; friendly and hostile acquisitions. A friendly acquisition is performed with the cooperation of the management while a hostile acquisition is performed against the will of the management. Acquisitions may also be classified by motive, where we have strategic and financial acquisitions.

Analysis

There are various reasons for acquisitions. The most common reason is seeking growth. The acquiring company may be seeking to expand its business or to acquire a dealership in a different line of products or services. Purchasing a going concern with a reasonable value and growth prospects would be better than starting a business from scratch. Acquisitions are also done in order to take advantage of economies of scale, a state is known as synergy.

A company may also buy another company with higher liquidity in order to raise funds. The presence of special employee skills and technology in a company could make it a potential target for acquisition. The presence of tax losses in a company may also attract a potential acquiring company that intends to gain a tax advantage (Gitman & Zutter, 2012).

The negotiation stage follows the identification of a target company and involves the determination of terms of the transaction such as purchase price and take-over process. The stage requires both parties to fully understand their objectives and aim to increase shareholder wealth. This is, unfortunately, not always the case. The acquiring company may lack a realistic valuation of the target company, simply relying on what they can afford to pay.

The presence of a counter-offer from another company could also increase the purchase price of the target company (Pearson Education, 2012). Mistakes such as over-reliance on the financial statements for due-diligence and purchasing companies simply because they are undervalued also cause acquiring companies to pay more for an acquisition than it is worth to them (Gome, 2007).

Despite both the real and perceived advantages of acquisitions, the majority of them end up decreasing shareholder value, with the greatest losers being shareholders of the acquiring company (Harshberger, 2009). In a study conducted on mergers and acquisitions in the US, Moeller, Schlingemann & Stulz (2005) observed that the acquiring firms lost twelve cents per dollar in aggregate value on their acquisitions. They attributed this loss to ‘negative synergy’ between both companies.

In order to avoid the losses to shareholders arising from acquisitions, both parties must plan for and communicate on the deal and consider integration factors such as the difference between the two companies’ cultures (Harshberger, 2009) after the acquisition process is complete.

References

Gitman, L. J., & Zutter, C. J. (2012). Principles of Managerial Finance, 13th ed. Upper Saddle River, New Jersey: Prentice Hall.

Gome, A. (2007). Why acquisitions fail: Top 6 blunders. Web.

Harshberger, M. (2009). How to create shareholder value through acquisitions. Web.

Moeller, S. B., Schlingemann, F. P., & Stulz, R. M. (2005). Wealth destruction on a massive scale? A study of acquiring-firm return in the recent merger wave. The Journal of Finance , 757-782.

Pearson Education. (2012). Why Acquisitions Fail – the 20 Key Reasons. Web.

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Corporate Acquisitions and Shareholder Value

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