Mergers, Acquisitions, and Corporate Restructurings, Fourth Edition

Chapter 4. Merger Strategy

This chapter focuses on the strategic motives and determinants of mergers and acquisitions (M&As). It begins with a discussion of two of the most often cited motives for mergers and acquisitions—faster growth and synergy. Proponents of a deal will often point to an ability to grow faster and/or anticipated synergy as the justification for a specific purchase price. The different types of synergy, operating and financial synergy, are explored in this chapter. It will be seen that operating synergy, including both economies of scale and economies of scope, has the most economically sound basis. Financial synergy is a more questionable motive for a merger or an acquisition.

Companies often merge in an attempt to diversify into another line of business. The history of mergers is replete with diversification transactions. The track record of these diversifications, with notable exceptions, is not very impressive. However, certain types of diversifying transactions, those that do not involve a movement to a very different business category, have a better track record. Companies experience greater success with horizontal combinations, which result in an increase in market share, and even with some vertical transactions, which may provide other economic benefits. Unfortunately, a less noble motive such as hubris, or pride of the management of the bidder, also may be a motive for an acquisition. This determinant, along with others, such as improved management and ...