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Motives and Effects of Mergers and Acquisitions

by JUANJUAN WANG

September 2007

A dissertation presented in part consideration for the degree of MA in Finance and Investment

Acknowledgements
I would like to take this opportunity to express my sincere appreciation to all those people who helped me complete this dissertation. Firstly, I do appreciate my supervisor Ms. Lynda Taylor’s assistance. She gave me valuable feedback and guidance throughout this dissertation.

In addition, I would like to send my deepest gratitude to Dr. Stephen Praffenzeller’s assistance. He helped me proof-reading the majority of this dissertation.

My sincere thank is also extended to my parents, my boyfriend and my cousin who gave me unconditional support and encouragement all the time during my study in the UK.

Further thanks to my parents who gave me this precious opportunity to study in the University of Nottingham in the UK.

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Abstract
Mergers and acquisitions, nowadays, play significant roles for helping companies achieve certain objectives and financial strategies. This dissertation, firstly, presents three major types of motives of participating in M & A. This part involves the motives that increase or decrease shareholders’ value or has uncertain impact on shareholders’ value. The motives which increase shareholders’ value include the synergy motive, improvement of managerial efficiency, achievement of economies of scale or scope, increased market power and increased revenue growth; whereas the motives which decrease shareholders’ value include the agency motive, managerial hubris and free cash flow; the diversification motive has uncertain impact on shareholders’ value. Secondly, the effects of engaging in M & A are examined based on four approaches in literature review. Generally speaking, M & A increase shareholders’ value for the target company, whereas they decrease shareholders’ value for the acquiring company or the newly combined company. Lastly, this dissertation advances quantitative research methodology- an accounting study-to measure the changes in the financial performance of the target and the acquiring company.

In order to control firm-specific, industry-specific, economic wide factor that may pose impact on the post-acquisition performance of the acquiring firm, the different financial performance indicators of the acquiring firm are compared with those of its non-acquiring peers. Moreover, two casesVodafone’s acquisition of Mannesmann AG and the merger between AOL and Time Warner- are selected in order to check the literature results. The findings present that both the target company and the acquiring company had a healthy financial performance before mergers and acquisition, but the acquiring firm suffered a great deal of loss after mergers and acquisitions. 3

Table of Contents

Page Number List of Tables-------------------------------------------------------------6 List of Figures------------------------------------------------------------6

Chapter 1 Introduction--------------------------------------------------8

1.1 Background of mergers and acquisitions---------------------------------8 1.1.1 Definition of mergers and acquisitions-----------------------------9 1.1.2 Types of mergers and acquisitions--------------------------------10 1.2 Objectives of the dissertation--------------------------------------------13 1.3 Research Methodology---------------------------------------------------14 1.4 Organization of the dissertation-----------------------------------------14

Chapter 2 Literature Review-------------------------------------------16

2.1 Motives of engaging in mergers and acquisitions-----------------------16 2.1.1 Motives which increase shareholders’ value----------------------16 2.1.2 Motives which decrease shareholders’ value---------------------22 2.1.3 Motive which has uncertain impact on shareholders’ value------25

2.2 The Effects of the motives in mergers...
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