“Companies are turning to the capital markets at a record pace to fund acquisitions” read the
headlines in mid-2015. At that point in time, U.S. firms had already raised roughly $206.3
billion to support their intended merger and acquisition activity. On a world-wide scale,
announced and completed mergers and acquisitions (M&A) by mid-2015 totaled $1.47 trillion.
This total was a 30 percent increase from the same time in 2014 and was the highest amount
allocated to implement merger and acquisition strategies since 2007. If this pace continued
through the end of 2015, the total global value of M&A transactions would exceed $3.7 trillion.
At the time, many executives anticipated that this robust amount of M&A activity would likely
continue and perhaps become even stronger in the next few years. But why? What causes
firms to use strategies that call for them to either merge with another or acquire another firm?
(As we explain later, a merger finds firms combining themselves as coequals, while acquisitions
find the target firm being
purchased by the acquir-
ing firm.)
As we discuss next,
the influences on firms’
decisions to use mergers
and acquisitions’ strategies
are varied and interesting.
The discussion of these
influences in the Open-
ing Case reinforces the
discussion in the chapter
about specific reasons why
firms choose to implement
these strategies.
The need to create
value for stakeholders is a
primary influence on firms’
decisions to engage in
M&A activity. Firms create
value in multiple ways,
including through the successful implementation of their business-level, diversification, interna-
tional and cooperative strategies. Sometimes though, firms can create additional value by merging
with another company or acquiring a firm. This is the case for life sciences companies today where
weak R&D pipelines are yielding too few products, increasing the difficulty of creating sufficient
amounts of value for stakeholders as a result. An analyst of this industry recently suggested that
“this pressure to create value is driving M&A, divestitures, and restructurings at unprecedented
levels throughout the industry.” (We discuss restructuring strategies, including those involving
divestitures, later in the chapter.) For firms in this industry, specific influences resulting in decisions
to engage in M&A activity include patent expirations, pricing pressures, and growth opportunities
in foreign and emerging markets.
Increasing confidence in a firm’s domestic economy, and perhaps in global economies as
well, is another influence on M&A activity. Observers of business conditions in the world are
now concluding that the after effects of the 2007/2008 global crisis on companies have largely
faded, resulting in boards of directors becoming more confident that their company should
pursue all feasible strategies with the potential to increase firm value. This is particularly
the case when growth in a firm’s domestic market is stagnant or declining. This appears
to be the situation facing a number of Japanese firms today in that although a number
of them have significant amounts of cash on hand, their domestic markets are shrinking
in size. Accordingly, these firms are examining what they believe are attractive merger and
acquisition opportunities outside of Japan. These firms do indeed seem eager to engage in
M&A activity as indicated by the fact that they paid an average premium of 46 percent for
the acquisitions they completed during 2015’s first quarter.
MERGERS AND ACQUISITIONS: PROMINENT STRATEGIES
FOR FIRMS SEEKING TO ENHANCE THEIR PERFORMANCEBhFoton/Shutterstock.com