RC Passage: Corporate Mergers

Time 0 0 : 0 0 : 0 0

Findings from several studies on corporate mergers and acquisitions during the 1970’s and 1980’s raise questions about why firms initiate and consummate such transactions. One study showed, for example, that acquiring firms were on average unable to maintain acquired firms’ pre-merger levels of profitability.  A second study concluded that post-acquisition gains to most acquiring firms were not adequate to cover the premiums paid to obtain acquired firms.  A third demonstrated that, following the announcement of a prospective merger, the stock of the prospective acquiring firm tends to increase in value much less than does that of the firm for which it bids.  Yet mergers and acquisitions remain common, and bidders continue to assert that their objectives are economic ones. Acquisitions may well have the desirable effect of channeling a nation’s resources efficiently from less to more efficient sectors of its economy, but the individual acquisitions executives arranging these deals must see them as advancing either their own or their companies’ private economic interests.  It seems that factors having little to do with corporate economic interests explain acquisitions. These factors may include the incentive compensation of executives, lack of monitoring by boards of directors, and managerial error in estimating the value of firms targeted for acquisition. Alternatively, the acquisition acts of bidders may derive from modeling: a manager does what other managers do.

According to the passage, during the 1970's and 1980's bidding firms differed from the firms for which they bid in that bidding firms
tended to be more profitable before a merger than after a merger
were more often concerned about the impact of acquisitions on national economies
were run by managers whose actions were modeled on those of other managers
anticipated greater economic advantages from prospective mergers
experienced less of an increase in stock value when a prospective merger was announced
GMATTM is a registered trademark of the Graduate Management Admission CouncilTM. The Graduate Management Admission CouncilTM does not endorse, nor is it affiliated in any way with the owner or any content of this web site.