Mergers and Acquisitions

• BP-Amoco-Arco

• Exxon-Mobil

• Time Warner-EMI

• National Westminster-Royal Bank of Scotland

• GEC-Honeywell

Mergers and Acquisitions

• What is a merger? A+B=C

• What is an acquisition (takeover)? A+B=A

• In economics the terms merger, acquisition and takeover are used interchangeably.

fig

0

200

400

600

800

1000

1200

1400

1600

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 19980

5

10

15

20

25

30

35

Number

Expenditure

Acquisitions and mergers by UK industrial and

commercial companies: 1970-98

Source: Financial Statistics (ONS)

Nu

mb

er

of c

om

pa

nie

s a

cqu

ired

Expe

nditure

(£bn

)

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20

40

60

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120

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1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

$ b

illi

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at

1998 p

rices)

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2500

Nu

mb

er

of

deals

Over $1bn

Under $1bn

Number

Cross-border majority mergers and acquisitionsCross-border majority mergers and acquisitionstargeting an EU companytargeting an EU company

Source: Based on information provided by Thomson Financial Securities Data

Classifying Merger Activity

• Hostile or Friendly?

• Contested not Contested?

• Horizontal, Vertical or Diversifying (Conglomerate)?

• Paid for by Cash, Stock or Mixture?

Motives for Merger

• Profit

• Cost savings

• Growth

• Diversification

• Ease of entry to new market (geographic or product, home or abroad)

• Market share

Who Gains?

• Gains to victim accrue from any appreciation in share price assuming that bid and/or final price > market price.

• Gains to acquirer accrue from expected performance improvements.

• These are difficult to quantify - you will never know what would have happened to BP had it not acquired Amoco.

Economic Measurement of the Gains

• Cost based - rare

• Market share studies - rare

• Profitability studies - reliability of accounting data.

• Share price studies - time frame crucial.

Outcomes and Evaluation

• The majority of studies show that the major beneficiaries of merger activity are the shareholders of the acquired firms.

• This could be because managers are opportunistically pursuing growth.

• It could also be explained by Roll’s hubris hypothesis.

Mergers

• Prospective mergers must satisfy the relevant regulatory bodies (UK and EU in the case of the UK).

• Referral often causes bidder to pull out.

• Looser forms of inter-firm collaboration exist - joint ventures and strategic alliances. Are these optimal or transitional?