13
Mergers and Acquisitions
Acquisitions are both an important source of growth for companies and an important element of a dynamic economy. Acquisitions that put companies in the hands of better owners or managers, or that reduce excess capacity, typically create substantial value both for the economy as a whole and for investors.
You can see this effect in the increased combined cash flows of the many companies involved in acquisitions. However, despite the fact that acquisitions overall create value, the distribution of any value they create tends to be lopsided, with the selling companies’ shareholders capturing the bulk.
Although it's true that, statistically, most acquisitions don't create value for the acquirer's shareholders, that's largely irrelevant for the executive trying to decide whether to proceed with an acquisition. The challenge for executives is to ensure that their acquisitions are in the minority that do create value for their shareholders.
MEASURING VALUE CREATION
The conservation-of-value principle helps us explain how to create value from acquisitions (see Chapter 3). Acquisitions create value when the cash flows of the combined companies are greater than they would have otherwise been. Some of that value will accrue to the acquirer's shareholders if it doesn't pay too much for the acquisition.
The value created for an acquirer's shareholders equals the difference between the value received by the acquirer and the price paid by the acquirer. The value received ...
