Mergers & Acquisitions for Society and Governance

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Effect of Mergers and Acquisitions on Environmental, Social, Governance Performance and Market value

The importance of the article is that it will give insight into the effect of acquisitions and mergers on the performance of the environment, society, and governance. It dictates that investors should pay attention to the ESG performance because the higher the ESG performance increases the market value of the ESG. To enhance corporate values, ESG performance can be improved by firms when the M&As strategy is used. The empirical analysis shows that the performance of the ESG mainly increases in the post-merger stage. However, the article explains that the value of a post-merger market of the acquirer increases in case of an increase in the performance of a post-merger.

In recent years, there has been an increase in the evolution of the SRI market, thereby increasing the need to develop metrics that many investors widely accept. In RSI, the metrics are important because they help in measuring performance sustainability. Research shows that many investors value a firm according to its ESG report, resulting in more returns in the stock market. Therefore, companies that publish ESG reports have higher stock returns than those that do not.

The Effect of Market Valuation on Mergers

This article will summarize and evaluate whether market valuation affects mergers. The data in the report portrays that a union has a relationship with how the market is valued. Almost all the firms have a market value that is higher or lower than the actual value of the respective firm. The private information of the target or bidders’ firm can tell them whether a market is over or undervalued but cannot find the reason for the under or over valuation. However, sometimes the target may use all the information they have to evaluate the market value correctly to spot all the misevaluations. Merger waves, therefore, occur when high synergies are accessed by the target, especially when the market is misevaluated.

From the statistics, it’s evident that there is an increase in merger activities when the market is overvalued. For example, between the years one thousand nine hundred and sixty-three and the years one thousand nine hundred and sixty-four, there was an increase in merger activity because the market was overvalued during this period. There is a big difference between mergers involving securities and cash takeovers because of the valuation problem in mergers. Sometimes, the valuation process becomes problematic till the court is used as a mediator to ensure that only the highest bid is accepted.

However, this problem can be approached differently because all the parties involved have private information on the other party and slight details on the market structure and condition. When overvalued, a target expects that the cause of the overvaluation is partly because of the market structure and the firm itself.

Reasons why Firms Merge then Divest

The article pays close attention to why firms merge then later divest. The concept talked about in this article applies to financially stable companies and those experiencing financial difficulties. Lack of proper financing prevents companies that are economically unstable from executing profitable projects. As a result, these companies have a high chance of participating in conglomerate mergers to help them get the funding to engage in promising projects. This conglomerate merging will stabilize the financially distressed firm, thereby excluding the union to avoid coordination costs. The disadvantage of this method is that managers of companies with financial stability will be more willing to participate in the coalition than managers of small companies even though they will not get many profits from the merge.

Diversified firms can have an extensive range of loan amounts that they can borrow from banks, thereby making them escape the tax associated with the deduction of interests. When two companies are combined, the loan tax they pay is considerably low compared to when they are on their own. This is because mergers can support positive projects that could not have been possible with standalone firms. According to this model, refocusing is the firm’s response to the shift in profitability.

Disadvantages of Conglomerate Mergers and Divestitures

The article mainly focuses on the insightful conclusions and the disadvantages of divestitures and conglomerate mergers. In summarizing this model, the empirical divestitures and conglomerate model have been contradicted. Empirically, a conglomerate merger is high during times when the economy is stable. The model contradicts it because the model states that the conglomerate merger increases when a firm’s profitability has reduced and the firm is financially distressed. In the article, that was the only weakness that I noticed, and it makes me feel that the authors did not talk about the issue adequately.

The study will talk about the purpose of chief executive hubris in giving insight and explaining the large number of premiums paid for acquisitions. It is found that the higher the number of investments done by CEO hubris, the more the losses accumulated by the shareholders. Premiums have a poor reflection of a firm’s prospects and resources and believe that they can increase the matter. The importance of bonuses is that they have a direct impact on the performance of acquisition. The returns are higher when then the premiums paid are slightly lower.

The article has widely discussed the relationship between the premiums paid on acquisition and the CEOs’ characteristics. The personalities of CEOs affect the high amount of dividends paid in the case of the target firm. To get a more detailed sample, the authors should have also investigated the impact of gender on the values of the premiums paid. This would have adequately exhausted the entire topic of discussion in the article. However, the amount of compensation is directly affected by the characteristics of the CEOs, especially when dealing with uncertainties that may arise from the merger.

Summary of the Four Articles

In summary of the four articles, the first article talks about the effect of the SRI report on investors and stock output. The second article talks about the impact of market valuation on mergers. It explains that the target may sometimes use its private information to estimate the value of the market to know whether they are overvalued or undervalued. However, the firm may not exactly know the cause of the misevaluation. This makes them accept the bid. The entire article is based on the fact that both the firms involved in a merger have private information on each other, which helps in detecting the misevaluation.

In the third and fourth articles, the reason firms merge then divest later is established and gives insightful conclusions on the disadvantages and advantages of conglomerate mergers. The second article shows that companies with low financial capabilities do not have the power to engage in profitable projects, thereby luring the managers into a conglomerate merger. The merger helps the companies achieve financial stability, making them divest to avoid paying the coordination costs.

However, this article contradicts the fact that conglomerate merging is high when the economy is stable. It instead states that mergers rise when a firm has a reduced profit margin. The three articles relate to each other because they collectively discuss the merging of firms, why they can divest, and the differences between a conglomerate merger and a divestiture. They give a proper understanding of merging between firms and their disadvantages.

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Mergers & Acquisitions for Society and Governance

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