M&A activity reached a new high in 2015, both globally and in the United States—
ID: 2762987 • Letter: M
Question
M&A activity reached a new high in 2015, both globally and in the United States—with large deals leading the way. Asia also reached a new record, with activity for the first time virtually tied with Europe as the second-busiest region for M&A.
By the numbers, more than 7,500 deals with a combined value of over $4.5 trillion had been announced as of this writing on track to exceed 2014 deal volume by 8 percent and deal value by 37 percent, and eclipsing the record of activity set in 2007. North American acquisitions accounted for more than 50 percent of global deals by value, while year-on-year growth of deal value in Asia over the first 11 months of 2015 exceeded the previous 11 months by nearly 60 percent.
But the big story in 2015 is around big deals. Megadeals—those valued at more than $10 billion—were up by nearly 130 percent by value year on year during the first 11 months of the year. Large deals, with a value between $5 billion and $10 billion, were up 24 percent, while small deals increased by about 10 percent. Announcement effects for acquirers in large deals, which went positive in 2013 for the first time in our records, dipped only slightly in 2015 as many investors continued to welcome announcements of large deals. Traditionally, such announcement effects have been a poor indicator of a deal’s eventual value. For instance, our analysis of past deals has found no correlation between share-price movement in the days after a deal is announced and a company’s excess total return to shareholders two years after a deal, when most synergies are captured.
Why do many investors continue to applaud big deals?
It could be a change in the types of deals. In the past, big deals were often seen as tactics to address cost reduction and industry consolidation—and many still are. But today we also see deals where managers and boards are talking about diversification and, for the first time in a long time, about revenue—about cross-selling and creating new customer opportunities, and about transformation. Some of that has always been part of the rationale for big deals, but given continuing strong announcement effects, it may be that investors are more receptive to it. Companies may also be getting better at integration and capturing deal synergies. In our observation, the discipline, professionalism, and capabilities around integration have certainly improved.
Explanation / Answer
Benefits of Merger & Acquisitions
Greater Value Generation
Mergers and acquisitions often lead to an increased value generation for the company. It is expected that the shareholder value of a firm after mergers or acquisitions would be greater than the sum of the shareholder values of the parent companies. Mergers and acquisitions generally succeed in generating cost efficiency through the implementation of economies of scale.
Merger & Acquisition
also leads to tax gains and can even lead to a revenue enhancement through market share gain. Companies go for Mergers and Acquisition from the idea that, the joint company will be able to generate more value than the separate firms. When a company buys out another, it expects that the newly generated shareholder value will be higher than the value of the sum of the shares of the two separate companies.
Mergers and Acquisitions
can prove to be really beneficial to the companies when they are weathering through the tough times. If the company which is suffering from various problems in the market and is not able to overcome the difficulties, it can go for an acquisition deal. If a company, which has a strong market presence, buys out the weak firm, then a more competitive and cost efficient company can be generated. Here, the target company benefits as it gets out of the difficult situation and after being acquired by the large firm, the joint company accumulates larger market share. This is because of these benefits that the small and less powerful firms agree to be acquired by the large firms.
Gaining Cost Efficiency
When two companies come together by merger or acquisition, the joint company benefits in terms of cost efficiency. A merger or acquisition is able to create economies of scale which in turn generates cost efficiency. As the two firms form a new and bigger company, the production is done on a much larger scale and when the output production increases, there are strong chances that the cost of production per unit of output gets reduced.
An increase in cost efficiency is affected through the procedure of mergers and acquisitions. This is because mergers and acquisitions lead to economies of scale. This in turn promotes cost efficiency. As the parent firms amalgamate to form a bigger new firm the scale of operations of the new firm increases. As output production rises there are chances that the cost per unit of production will come down
Mergers and Acquisitions are also beneficial
When a firm wants to enter a new market
When a firm wants to introduce new products through research and development
When a forms wants achieve administrative benefits
To increased market share
To lower cost of operation and/or production
To gain higher competitiveness
For industry know how and positioning
For Financial leveraging
To improve profitability and EPS
An increase in market share is one of the plausible benefits of mergers and acquisitions. In case a financially strong company acquires a relatively distressed one, the resultant organization can experience a substantial increase in market share. The new firm is usually more cost-efficient and competitive as compared to its financially weak parent organization.
It can be noted that mergers and acquisitions prove to be useful in the following situations:
Firstly, when a business firm wishes to make its presence felt in a new market. Secondly, when a business organization wants to avail some administrative benefits. Thirdly, when a business firm is in the process of introduction of new products. New products are developed by the R&D wing of a company.
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