M&a: A Definite Overpayment Within the Wine Industry

M&A: A Definite Overpayment within the Wine Industry

The merger and acquisition simulation was beneficial since our team analyzed Bel Vino, Starshine, and International Beverage, and developed valuations based on future performance and synergies. Our team was Starshine and we had the options to acquire Bel Vino or be acquired by International Beverage. After making our valuations in round one, the goal was to make negotiations and a deal with the other teams that would create value. In this paper, we will discuss our research of mergers and acquisitions, the United States and global wine industry, and our overall experience and analysis during the simulation.

M&A Activity in the United States

There are many reasons a company may plan to merge or acquire another company, within or outside its current scope of operations. After looking at previous deals, we saw that one of the main reasons companies merge or acquire each other is to grow revenue by obtaining more market share (at the same time decreasing competition) or using the company to enter a new market. Of course, not all goes according to plan, which has led to the failure of most mergers and acquisitions “to create value for shareholders down the road” (Burrows). This can be caused by wrong goals and motives of the merger or acquisition. However, if the companies can be tied together seamlessly and managed efficiently, the end result can be value creation. These well thought out plans can be seen by reviewing the number of M&A deals that occur each year.

When looking for targets for a merger or acquisition, companies look at synergies that will create value. The main synergies are operations and managerial. Operation synergies allow the company to gain more market share and sales or lower costs. Managerial synergies take advantage of a better management team that can make the business more efficient and effective. There are also synergies that come from a larger company, like less risk and market competition.

According to an article from The Journal of Financial Economics, one of the sources of motivation that is not valid when standing alone is merging or acquiring a company in order to increase market share. All deals that end up destructing value involves overpayment. Post-merger operating performance shows that “poor target selection, compared to overpaying for good targets, explains the value destruction” (Harford). If a target company is chosen and has no or low synergies, overpayment will occur since any premium amount will be overpayment. These lack of synergies can be caused by “a poor match” that is covered up by the goal of creating an empire rather than value. At the same time, synergies could exist, but mangers may over look them and fail to take advantage. Another cause of poor motivation is choosing a target company not in the scope of current operation. There is an obvious lack of synergies in these situations and it is also difficult to create the same magnitude of cash flows with the less related company. However, these transactions take place in order to diversify the company’s risk into different industries.