21: Mergers, Acquisitions and Corporate ControlThough market position mergers sometimes make good economic sense, there are at least three
issues that may limit a potential merger’s viability. First, government antitrust regulations are designed
to prohibit a single company (or companies) from gaining sufficient market power to set prices above
the competitive level. Consider the proposed US merger of Staples–Office Depot from 1996. With only
three companies competing in this industry before the merger, the regulatory authorities denied this
acquisition on the grounds that the merged company would have the power to control prices in the office
supplies market, with only one (much smaller) competitor to provide price competition. In February
2015, Staples announced new plans to acquire Office Depot, but this was opposed by regulators in
December 2015, on the grounds that it would reduce competition and drive up consumer prices. It
seems that this saga is ongoing – at the time of writing (January 2016) Staples is trying to formulate
alternatives that will be acceptable to the regulators.^8
The second issue, which is particularly pertinent to Australia and other countries with a limited
number of industry participants, is the issue of national interest (or control). Often, domestic companies
may control so much of the domestic market share that its only viable acquirers are based overseas.
However, given their near monopoly positions in the domestic market, acquisition of these companies
by foreign bidders could be considered to be against the national interest, as these acquisitions would
effectively transfer control of domestic markets and assets overseas. In such cases, the government may
intervene to prevent these deals from going ahead. A classic example of this is evident in the story of
the demise of Ansett Airlines, which was at one time Australia’s second-largest airline. When it first ran
into financial difficulties, the company was partially owned by Singapore Airlines, Air New Zealand and
(then) News Corporation. Singapore Airlines offered to buy the airline, but was effectively blocked by
both the Australian and New Zealand governments, which were both concerned about their national
interests. Air New Zealand was eventually allowed to acquire the company, but it ran into financial
difficulties and interference issues with both governments, and eventually had to let Ansett collapse
or risk the failure of Air New Zealand as well. More recently, in April 2011, the Australian government
blocked the $8.4 billion takeover bid for the Australian Stock Exchange that had been made by the
Singapore Exchange. This was because the Federal Treasurer believed that the merger would be ‘contrary
to the national interest’.
The third issue is the fundamental question of whether the merger increases company value. From
the acquirer’s point of view, this means making sure not to pay more than the net present value of
incremental cash flows attributable to the merger. From the seller’s perspective, though it can be a hard
pill to swallow, at times selling the company may create more net present value for shareholders than the
target could create if it remained independent or instead attempted to acquire another entity.
Relative Valuation
Managers often state that they acquire assets or companies that are undervalued by the market. Some argue
that high-value (perhaps overvalued) companies buy low-value (perhaps undervalued) companies.^9 A company
that uses its overpriced shares as currency to purchase undervalued assets on the cheap does, of course,
create value, but keep in mind that this implies that the market is inefficient on two counts: in overvaluing the
8 For more, see http://www.fool.com/investing/general/2016/01/04/why-staples-inc-and-office-depot-inc-tumbled-in-20.aspx. http://www.investopedia
.com/articles/investing/092515/office-depot-and-staples-merger-what-you-need-know.asp?header_alt=c. Accessed 9 January 2015.
9 Rhodes-Kropf, Robinson and Viswanathan (2005) measure value based on MB, the market-to-book ratio (the market value of the firm divided
by the book value of assets). These authors show that targets do not in fact have low value. They argue that the more correct statement is
that ‘high MB buys somewhat lower MB’ on average. These authors show that high MB firms have a tendency to buy medium-to-high MB
firms, while medium-to-low MB firms acquire low MB companies.
Do mergers, on average,
succeed or fail from the
standpoint of creating new
value? If they fail, why?thinking cap
question