Question

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True/ False - On average, acquisitions destroy shareholder value

Identify a corporate acquistion (within the last 10 years) which added value to the acquiring company and discuss a minimum of three (3) key factors which enabled their success?

Answer 1

On average, empirically, most acquisitions have not created and even destroyed shareholder value. Hence the aforementioned statement is True.

The reason this happens is because the company being acquired usually commands a huge premium over its current market share price, to be lured into acquisition. Also, the fees involved in completing an acquisition is also quite high.

Additionally, the acquired company is usually a small company with potential. However, many times, they do not live up to their potential.

One acquisition in recent years which has created great value for the acquiring company is social media giant, Facebook's acquisition of Instagram. Facebook acquired Instagram, a photo-sharing app back in 2012 for only $1 billion, when it had only a few million users. In seven years, Instagram's monthly active users grew to over 1 billion and is now a major driver of Facebook's growth. Facebook made $17.6 billion in revenue during the third quarter of 2019.

Here are three factors contributing to Instagram's success:

1) Instagram attracts the younger audience, like millennials and Gen Zers. Instagram cloned Snapchat's features like "Stories" and face filters, which were very popular among younger people

2) Instagram's engagement rate is much higher than most other platforms like Facebook. Hence, Instagram can command a higher ad rate.

3) On Instagram, Users have been generating content which are followed intently by users. Advertisers have leveraged this popularity.