Assignment
Mergers - for managers or shareholders? A number of surveys in recent years have suggested that the owners of companies, the shareholders, rarely benefit from mergers. For example, Buckingham and Atkinson (1999) note that only 17% of mergers and acquisitions produced any value for shareholders while 53% of them actually destroyed shareholder value. However, there is ample evidence (Fuller, 2004) that managers' remuneration packages may be more closely related to variables such as growth in corporate turnover and growth in company size than to corporate profitability. This misalignment of incentives between senior management seeking growth and shareholders seeking profit may be an important factor in the continued drive towards M&A as a strategic focus, with managers seeing M&A as the quickest way to grow both turnover and company size. Another reason for mergers often failing to increase profitability and therefore shareholder value may be put down to the overconfidence and lack of judgment of senior management and the self-interested city financiers who advise them. These flaws can show up in all three phases of any merger activity, namely the planning implementation and operational phases.
For example, in the planning phase the top management of the merging firms invariably see benefits from combining operations which are rarely actually achieved. Steve Case, the founder of America Online, stunned the world in 2000 by announcing his intention to acquire Time Warner, a merger completed in January 2001 with the birth of the new combined company AOL Time Warner. When AOL revealed its intention to acquire Time Warner the Internet boom was at its peak and AOL's sky-high share value gave it the paper wealth to make its £97bn offer, despite the fact that Time Warner's revenues were four times higher than AOL. The expected benefits of combining the companies were seen in terms of linking, for the first time, a major Internet company with a major media company. Ted Turner, vice chairman of the new company, said ‘I have not been so excited since I first had sex 42 years ago.' Yet just two years later, in January 2003, Steve Case announced his intention to stand down as chairman, with the new company valued at less than one-quarter of the £162bn value placed on it at the time of the merger.
In the implementation phase culture clashes at corporate or national levels may also occur, preventing potential benefits being realized. For example, at the corporate level, acquisitions involving a traditional bureaucratic company with an innovative entrepreneurial company will invariably bring conflicts, with the result that for some employees there will be a loss of identification with, and motivation by, the new employer. High-quality human resources are extremely mobile and key knowledge, skills, contacts and capabilities are embedded in these employees, whose loss as a result of the M&A activity will seriously diminish the prospects of the new corporate entity. Finally, in the operational phase the hoped-for economies of scale and scope may fail to materialize, for a variety of reasons, not least problems of coordination and control when new, integrated computer systems fail to work as intended. In surveying 253 horizontal mergers in manufacturing in the EU and US, Laurence Capron (1999) found that only 49% of companies believed that the implementation of the merger had created any positive net value in terms of the overall outcome.
Question
1 How has the separation between ownership and control acted as a stimulus to merger activity?
2 Why do so few mergers seem to create extra value for shareholders?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.