¡ M & A: Company A (Acquirer) buys Company B (Acquired

Or Target Firm)

¡ Typically Creates A New Firm

§ Daimler Benz and Chrysler Merged To Become Daimler-Chrysler

(New Identity)
¡ Volume of M & A
§ 1999 – US$ 3.3 Trillion
§ 2000 – US$ 3.5 Trillion
§ 2004 – 30,000 Acquisitions Globally (One Every 18 Minutes) Valued
at US$1.9 Trillion
§ 2007 – US$ 4.5 Trillion
▪ 47% of The $4.5 Trillion Involved Cross-Border
▪ M&A
¡ Technological change
§ Major companies jockeyed for position in rapidly evolving technologies
¡ Changes in regulatory environment
§ Examples liberalization of economies, opening up of FDIs, IJVs, etc.
¡ Globalization
§ Companies found they needed to be big to operate on the global stage: Markets,
Resources, Knowledge, Human/Social Capital
¡ Stock price appreciation
§ Bull market in late 1990s gave some companies the means to purchase others
§ 56% Of Acquiring Firm Managers Reported Meeting Pre-Acquisition
Performance Objectives
§ 70% Of Target Firm Managers Left Their Jobs within 5 Years
§ Both Managers Reported Acculturation Stress During Post Merger
¡ Market Power – Merged Firm Has Greater Power Over
Consumers (Transfer of Wealth from Consumers to Firm)
¡ Efficiency – Focuses On Cost Side
¡ Resource Deployment – Redeployment of Competencies and
Assets To Generate Economies of Scope
¡ Market Discipline – Protects Shareholders from Poor
Management
¡ Compensation – Firm Size Positively Correlated With
Executive Compensation

¡ Managerial Hubris – Managerial Ego and Exaggerated Self-

Confidence
¡ Environmental Uncertainty– Less Diversified Firms Pursue
Acquisitions to Reduce Uncertainty

¡ Resource Dependence – Firms Acquire Other Firms To Reduce

Dependence On Scarce Resources
¡ Acquisition Experience – Prior Experience In Acquisitions
Increases Likelihood of Subsequent Acquisition
¡ Firm Strategy – Companies Following A Global Strategy Have
Higher Proportion of Greenfield Developments than
Companies Following Multi-Domestic Strategies
¡ Firms Facing Strategic Hurdles (Lack of Resources, etc.,) More
likely Targets for Acquisitions
¡ Value Creation Refers To Short-Term and Long-Term Stock
Holder Returns to
§ Acquiring Firms’ Shareholders
§ Acquired Firms’ Shareholders
§ Performance of the Firm After Mergers and Acquisitions
§ Yes, M & A Creates Value for Shareholders
¡ Company A (Acquiring Firm) Buys Company B (Target or
Acquired Firm)
§ Return To A’s Shareholders Either None or Negative
§ Return to B’s Shareholders Positive
¡ Over Payment for Target Firms
¡ Lack of Integration Of Target Firm and Acquiring Firm
(Systems and Processes)
¡ Strategic Misfit Post-Acquisition
¡ Post Acquisition Loss of Talented Managers and Human
Capital
¡ Cultural Conflict Between Acquiring and Target Firms
¡ Growth To Be By-Product of Profitability Not An End In Itsel