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Mergers & Acquisitions

Theory, Strategy, Finance

Mohammed Ibrahimi

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Introduction

Mergers and acquisitions play a critical role in company development policy. They enable the development of operational and financial synergy, a better use of resources and fiscal potential, resistance to shocks within the industry, a rapid increase in growth, access to strategic knowledge and skills, greater stock value, an increased share of the market and the removal of entry barriers via the reduction of competition. Their main objective is to create value, something which often depends on the new mode of directing the different stages of integration and the management of the new entity.

The purpose of mergers between two companies is to foster the acquisition of new powers and the appropriation of new human and material resources. Over the last few decades, mergers have occurred in all sectors, all over the world, resulting in the emergence of international industrial giants. In recent years, mergers and acquisitions have taken place on a phenomenal scale, with a value of 2,069 billion euros in 2010 increasing to 3,177 billion euros in 2016.

Several factors have contributed to this explosion in merging operations: financial crises, accelerated economic globalization, financial deregulation and permanent technological innovations. In parallel, these elements have all created a need for major industrial restructuring in order to prevent the loss of competitiveness. This explains the fact that most current mergers and acquisitions have been of the horizontal type.

Similar patterns can be seen in studies of these events, with several thousand publications. These studies have focused, for example, on value creation in mergers and acquisitions, on motivations, on factors influencing performance, on the people involved in these operations, on calculation methods, and on the sources of value creation. The number and variety of contributions in this domain are hard to quantify. The results observed in different studies are often contradictory, due to differing understandings of certain notions and to the variety of subjects involved. In some cases, an operation is seen to have created value and to have been beneficial for company growth; on other occasions, operations are seen to have destroyed value and are considered to be failures.

These differences can only be resolved at the company level. The adoption of any external growth strategy is a subject of critical importance with regard to investment choices. In this respect, company financial strategy may focus on internal and/or external development aims. This choice is of crucial importance, as it defines the broad strategic orientations of the firm and determines the speed of its development. The chosen direction often depends on the initial starting point for the company; it is very rare for a firm to decide to pursue multiple external growth strategies at the same time.

In choosing to focus on rapid external growth, companies must select one of the three available options. The first option concerns horizontal mergers or acquisitions, bringing together two competing companies serving the same market or selling similar products. This is the most common form of external growth. The second option is a vertical merger or acquisition, implying the fusion of a company with a client or supplier acting at a different stage in the production process. The third option is a conglomerate merger between two companies with no shared production or market connections.

PART 1
Taxonomy of Mergers and Acquisitions and the Evolution of Managerial Thought