Share Value

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Do Mergers Create Value for the Offerer and Offeree?

Companies undertake mergers and acquisitions in the hopes and belief of creating a Synergy. A Synergy infers that the joint companies will gain the means to become more profitable or expand at a higher rate after acquisition then the companies functioning independently. This essay will examine whether or not synergies do in fact create value and if so, for whom? Who benefits from the value created by synergy, in other words, is it the shareholders in the acquiring firm or the shareholders in the target firm.

There are many motives for a merger; they include increased market power, which is the ability to control the price of the product, managerial motives, which refers to the dominating party, as they will have responsibility to control a larger enterprise, this leads to increased status and higher earnings for the management team. Another motive for a merger is to achieve economies of scale, which means that a larger company can bring about a lower cost per unit of output.

The biggest motive of the merger process is to create shareholder value, and this is achieved through synergy. This refers to when two firms join together create a higher value than the value of the firms apart. The increased value comes from the increased revenue and cost base of the merged companies. However, the question is whether mergers really do create synergy and reward to shareholders. An article by Sirower (1997) had found that “many merger result in unforeseen difficulties that actually result in even worse stock performance.”

The problems with mergers start with the acquirers company, as they face a greater loss in the forming of a merger, this is because the acquirers sometimes pay a stock-price premium besides the pre-bid share in order to give the target shareholders an incentive to sell; this causes their shareholders a great loss, because due to the concept of synergy, the benefits of mergers are overestimated. This situation is referred to as the ‘synergy trap.’

Even though evidence suggests that acquiring shareholders do not really gain from mergers however, target shareholders gain sufficiently from them, but still the acquirers have the advantage when it comes to the managing of the company.

This view states that mergers can be value destroying and a form of gamble. There is no evidence of the companies making any mutual gains after a merger has taken place, therefore this supports the argument that mergers lead to the destroying of shareholder value.

Research had also found that the “largest companies are precisely the ones that are allowed the fewest opportunities to enhance shareholder value” Sirower (1997) It may be difficult for larger companies to merge because it can be seen as if they are trying to monopolize the industry. Large companies already hold status and power so it wouldn’t be fair on the smaller or medium sized companies if the large companies kept expanding their business, therefore they are prevented to expand through vertical or horizontal mergers. This may give medium sized entities an advantage.

An example of an acquisition was between Morrison’s supermarkets, which had taken over its rival grocer Safeway. This was a horizontal merger between the two enterprises that meant that they both were of equal standards and engaged in similar lines of activity. Together both companies could achieve economies of scale. This could lead to enhancement in market power and reduction in competition.

However, in reality the shareholder of Morrison’s didn’t do as well as they had planned. This takeover had taken place in March 2004; however, in July 2004 Morrison’s had received their first profit warning, which was “caused by falling sales at Safeway stores.” Wikipedia (2011) The share price of Morrison’s from when the merger had taken place in March 2004 was 251p, however when they had received their first profit warning the share price had...
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