M&as : Shareholders’ Value Boomer or Disaster?

M&As : Shareholders’ value Boomer or Disaster?

Yuhuan Kong

Rutgers University

Introduction

M&A’s are an effective step for a corporation to enlarge its economies of scale, take advantage a combination of both tangible and intangible assets, thus make a further step

into new markets. Although creating value for shareholders is the principle objective of every corporation, it is also the common wisdom that most M&As fail on this point.

This paper starts with a fierce discussion of  whether M&As create or destroy shareholders value, followed by the reasoning of each point. Moving forward, it also displays the litigation situation of M&A in recent years. Finally, the paper ends up with several suggestions for both CEOs and shareholders before reaching a M&A deal.

In June 2014, it was announced that the value of M&A in the first half of the year hit a seven-year high at $1.75tn. Risk aversion and organic expansion, embraced after the financial crisis, and are being pushed aside as the belief returns that growth can be more easily bought than built. Gilberto Pozzi, head of M&A for Europe, Middle East and Africa at Goldman Sachs, said “Availability of debt and low cost of financing are enablers of M&A, but deals remain driven by strategic logic” (Dan, 2014).

Value Destroyer

The expectation for a merger is that it will boost shareholder value, however, most studies indicate that M&A appear to destroy shareholder value. Rather than all transactions, a majority of the deals ranging from 50-90 percent, destroy shareholder value and ultimately fail. Here may jump out some executives to argue that, the failure should always be attributed to a lack of synergies, realistic vision, or appropriate premium price, however, is that the whole story?

In 2005, Ebay announced a $2.6 billion acquisition of Skype, however, only to sell the company for $1.9 billion after four years, in 2009. Obviously, the merger was a big loss due to the failure to integrate their technological systems. According to the CEO, other reasons behind the failed attempt could be management's tough push for growth at any cost, short-term focus, or overvalued intangibles of a particular deal. Furthermore, Other issues associated with M&A that will destroy shareholder value are deficiency of changes management and also poor communication with stakeholders (Dan, 2014).

Let’s take a look at the report of litigations that challenge M&A deals from 2007 through 2013, and most of them are taking the form of a class action.[pic 1]

As we can see above, deals challenged by shareholders are at a rapid growth. Actually, according to the 2013 litigation report, plaintiff attorneys filed lawsuits in 94 percent of all M&A deals announced in 2013 and valued over $100 million, a total of 612 lawsuits. The “race to file” appears to have subsided over the last five years. In 2013, the first lawsuit was filed an average of 11.7 days after the deal announcement, compared with 9.3 days in 2012, and 6.5 days in 2009 (2013 Litigation Review).