Academic journal article Journal of Economic and Social Development

Theoretical Overview of Microeconomic Aspects of Mergers and Acquisitions

Academic journal article Journal of Economic and Social Development

Theoretical Overview of Microeconomic Aspects of Mergers and Acquisitions

Article excerpt

1. Introduction

In turbulent business environment of 21st century companies are forced to use different growth strategies in order to successfully position themselves with respect to competition and to preserve and increase their profit margins. Growth strategy is part of the corporate strategy which emphasizes corporation as a whole and provides answers regarding business scope of the corporation and recourse allocation (Tipuric, 2005, p. 105). Growth strategies are concerned with increasing the size and viability of the business over time. A successful growth strategy will allow entrepreneurs to increase its customer base, market segments, geographical scope, and/or product lines, which should lead to revenue growth. Mergers and acquisitions, as a part of growth strategy, but also as a research field of numerous scientists and consultants, represent prominent phenomenon of developed capitalist world since the end of 20th century. Mergers and acquisitions have become popular choice for companies' growth and expansion. M&A come in waves and extant literature identifies six M&A waves. In academic community heterogeneity regarding probable obstructions for successful execution of M&A prevails. Employee resistance, changes in business strategy and organizational structure, as well as changes in organizational culture are being analyzed and pointed out as crucial variables for M&A success. Since majority of research in field of M&A is focused on organizational variables the main aim of this paper is to present overview of microeconomic aspects of M&A with special focus on industry structure and its impact on M&A success. Besides, historical development of mergers and acquisitions is also presented in this paper.

2. Historical development of mergers and acquisitions

Research regarding M&A is present in economic literature for a long time period starting form 1890s. It is a well-known fact that mergers and acquisitions come in waves when firms in industries react to shocks in their operating environments. Shocks could reflect such events as deregulation; the emergence of new technologies, distribution channels, or substitute products; or a sustained rise in commodity prices (DePhampillis, 2014, p. 11). Thus far, six completed waves have been examined in the academic literature. Beginning of the first wave at the end of 19th century in the United States of America was characterized with huge technological changes, economic expansion and innovation in industrial processes. An important attribute of this wave was the simultaneous consolidation of producers within industries, thus qualifying the description "horizontal consolidation". Nobel Prize winner George Stigler described the first wave as merging for monopoly. In that time period more than 1800 firms disappeared due to consolidation, and many of the US corporate giants such as General Electric, Eastman Kodak, American Tobacco and DuPont during the first wave trough such consolidation. The wave came to an end around 1903 -1904 due to the stock market crash (Sudarsanam, 2010, p. 16).

M&A activity remained at a modest level until the late 1910s as a consequence of the First World War. The second takeover wave emerged in the late 1910s and continued through the 1920s. The second wave was considered as a move towards oligopolies because, by the end of the wave, industries were no longer dominated by one giant firm but by two or more corporations. Most of the mergers of the 1920s were between small companies left outside the monopolies created during the previous wave. By merging, these companies intended to achieve economies of scale and build strength to compete with the dominant firm in their industries (Marynova and Renneboog, 2008, p. 2150). The second wave accompanied economic growth and stock market boom. An estimated 12.000 firms disappeared during this period, although the impact on the market structure of industries was much less dramatic than the first wave mostly due to antimonopoly legislation acts. …

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