Mergers and Acquisitions

Table of Content

Introduction3

Theories on leakage and remedies for maximizing shareholder value4

Discussion6

Leakages of shareholder value: causes and remedies9

Diffuse governance structures10

Reallocation of effort11

Internal focus12

Waste of effort14

Remedies to limit reallocated effort16

Managing the trade-offs18

Maximisation of shareholder Value in different types of M&As24

Conclusion28

Mergers and Acquisitions

Introduction

The potential to create value in mergers and acquisitions (M&As) rests on the premise that a firm can supplement or complement its core skills and resources through synergistic or value-creating combinations with other firms. The aggregate evidence on merger and acquisition performance, however, suggests that, on average, acquiring firms' shareholders fail to benefit. In this article, we argue that a possible explanation for these disappointing results is the leakage of shareholder value during the integration process.

Shareholder value leakage can be defined as the dissipation of the potential value of combining, or the negative impact of the act of acquiring, on the intrinsic value of either firm. Merger prospects often wrongly assume that all the projected synergies will be allocated to the shareholders. Managers bargain for shared power and autonomy, and employees for continued employment, increased compensation and more time to adjust. The implicit costs are integration costs that arise as a result of managers and employees reducing and/or reallocating their effort during the post-merger integration process. Reduction of effort is caused by demotivation, unrest and loss of identity during this process, while re-allocation is caused by the redirection of their attention away from directly productive activities towards integration tasks(Balogun 2006).

Identifying the leakages of shareholder value is, however, only a first step. More important for owners and top managers is to examine what can be done to avoid or limit such rent-seeking and implicit costs. While the M&A literature suggests many remedies to counter reduction of effort, there is a considerable gap in the literature on how to avoid rent-seeking and reallocated effort in the post-merger process. Based on our findings, we suggest remedies for each type of leakage of shareholder value.

Identifying the remedies for each type of shareholder leakage is, however, not the final step. Remedies designed to address one source of shareholder leakage may have opposing effects in other areas, and these effects need to be explored and understood. Avoiding leakages of shareholder value will involve managers finding new solutions to balance these trade-offs.

Theories on leakage and remedies for maximizing shareholder value

Rent-seeking managers and employees seek their share of M&A gains by bargaining for private benefits at the expense of the shareholders. The rent-seeking literature argues that such activities may absorb exactly as many resources as the pure rents to be won; hence, all potential synergies could be absorbed in this way. Managers' empire-building desires are well documented in the M&A and strategic management literature, and so is their resistance to takeovers where they risk losing their power. While we have extensive knowledge on how managers seek rents at the expense of shareholders during the pre-M&A process, there is little evidence on how this rent seeking behaviour leads to leakage of shareholder gains during the post-merger ...