Question

When one company merges with another, common business wisdom suggests that
the newly combined firm has a lower risk of going into default, because the
transaction gives the merged corporation greater diversity than the two individual
participants. However, according to a study by Craig Furfine, a Professor of Finance
at the Kellogg School of Management, and Richard Rosen, of the Federal Reserve
Bank of Chicago, that common wisdom is wrong. “On average,” Furfine says,
“acquiring firms become riskier post-merger” (Kellogg Insight Online, 2011).

a) Discuss at least four reasons why companies engage in mergers and acquisitions.

b) Critically evaluate the claim that mergers and acquisitions reduce risk and
increase shareholder wealth. Your answer should elaborate on any examples of
concepts and theories which suggest this is not the case.

c) Briefly discuss the findings of Levi et al (2014) in relation to the influences of
director’s gender on bid premia paid in acquisitions.

Answer 1

Main reason for company prefer to go for Acquisition and Merger , mainly due to :

1. Synergy - Consolidating companies or assets , with an eye toward stimulating Growth
2. Element Competition- Gaining competitive advantage
3. Growth and Market Share- Increase in Market share
4. Supply – Chain Pricing- Influencing Supply chain

Merger and Acquisition is not always good . Major reason for M&A would be

1. Growth from Acquiring new product , markets and customers
2. Increased profitability based on the strategic potential of the deal

BUT , M&A can be failure mainly due to following reason :

1. Limited or No involvement from the Owners- Ideally Owners should be involved right from the start and rather derived deal as per their own structure and not involved only on Advisor
2. Theoretical valuation vs Practical Position – The numbers and assets that look good on paper may not be the real winning factors . The failed case of Bank of America acquisition of countrywide is a unique example
3. Lack of communication – A major challenge for any M&A deal is the post merger integration. Very careful analysis is require on case of Key employee , crucial project , sensitive process , and impacting bottleneck.
4. Required capacity vs current bandwidth – Need to ensure that existing firms resources already fully or over utilized , leaving no bandwidth for the future to make the deal a success ..
5. Actual cost of difficult integration vs high cost recovery – Investment today in a difficult integration spread over the nest few years may be difficult to recover in the long run
6. Negotiation Errors – In certain cases of overpaying for an acquisition + high advisory fees also rampant in executing M&A deals – leads to financial losses
7. External factors- External factors may not be fully controllable
8. Assessment of alternative- some time it will help to consider extreme options which may prove more profitable , instead of holding onto traditional thoughts

Back Up plan – report is saying more than 50%+ M&A deals failing , so company must keep a back up plan to avoid Losses

Brief case discussion on “ Levi et al – Year 2014 ) – Major factor was less overconfident female CEO’s overestimate merger gains less .

Only one study has been performed that examines the difference n bid premiums between men and women . Therefore this thesis uses articles that describe general determinants behind overbidding and links it to gender characteristic A reason behind overbidding is the joy f winning , the winning independently of the monetary value of the prize. Under gender category , men are in general more eager to win than women. This leads to the assumption that women are less likely to overbid due to the Joy of winning than men .

The main purpose of the thesis is to examine whether bid premium are dependent on the gender of the acquiring firms CEO and if network operate as a moderating variable .

What is Bid premium – The difference between the company’s true value and the actual paid price is called a bid premium. Now most important factor would be “ CEO’s gender and bid premium “

The theory bout overconfidence , men generally act more overconfident than women As per above case women are expected to pay lower bid premiums due to their lower overconfidence . This study pointed out that each additional female on bidder board reduces a bid premium by 15.4%

In case of firms have limited access to financial resources , they cannot afford to make mistakes and its director will be less likely to overbid . Now it s the case than women in general are less overconfidence.

From the analysis performed by Levi at el it becomes clear that bid premium can be negative , despite the fact that a premium in finance is generally considered as a surplus , where as negative out come should be result in a discount. The bid must be set high enough in order to complete against other potential acquirer , bit not so high that acquisition is too expensive relative to its advantage