Magazine article Strategic Finance

Using M&A in Your Company

Magazine article Strategic Finance

Using M&A in Your Company

Article excerpt

Why do some mergers succeed and others fail? In Maximizing Corporate Value through Mergers and Acquisitions: A Strategic Growth Guide, Patrick Gaughan examines a large body of research to find the best ways to maximize shareholder wealth using mergers and acquisitions (M&A). Prior to doing deals, management needs to be aware of the strategy, diversification, integration, and valuation effects of M&A and how they are different for bidders and targets. Gaughan takes a systematic approach when examining the risks and benefits associated with different kinds of deals.

A major reason companies use M&A is to diversify their product base beyond their industry in an attempt to enter new markets. Gaughan provides examples and studies from the 1980s and 1990s that show this strategy for M&A is questionable at best. Increased corporate focus on specialization was consistent with shareholder wealth maximization, not diversification.

He found that three types of acquisitions caused lower and usually negative returns in M&A:

1. Diversifying M&A--If a company is going to diversify, evidence shows that related acquisitions within an industry are significantly better than unrelated acquisitions.

2. Acquiring a rapidly growing company--The negative impact of acquiring a rapidly growing company reflects the difficulty in buying growth and the reality that most companies are forced to overpay for growth projections.

3. Acquiring a company when existing management has a poor performance record prior to the deals--If an executive performs poorly at running an existing business, increasing managerial demands with M&A will result in more of the same, or worse, performance. …

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