Chapter 7: Merger and Acquisition Strategies 207Hand-out/AURICO GOLD INC./Newscom
Pictured here are individual employees from two companies—Alamos
Gold Inc. and AuRico Gold Inc.—who will now work together in the
same company as a result of a merger.In the final analysis, firms use these strategies for the purpose of trying to create more
value for all stakeholders.
Although popular as a way of creating value and earning above-average returns, it is
challenging to effectively implement merger and acquisition strategies. This is particu-
larly true for the acquiring firms in that some research results indicate that shareholders
of the acquired firms often earn above-average returns from acquisitions, while share-
holders of the acquiring firms typically earn returns that are close to zero.^7 Moreover, in
approximately two-thirds of all acquisitions, the acquiring firm’s stock price falls imme-
diately after the intended transaction is announced. This negative response reflects inves-
tors’ skepticism about the likelihood that the acquirer will be able to achieve the synergies
required to justify the premium to purchase the target firm.^8
Discussed more fully later in the chapter, paying excessive premiums to acquire
firms can negatively influence the results a firm achieves through an acquisition strategy.
Determining the worth of a target firm is difficult; this difficulty increases the likelihood
a firm will pay a premium to acquire a target. Premiums are paid when those leading an
acquiring firm conclude that the target firm would be worth more under its ownership
than it would be as part of any other ownership arrangement or if it were to remain as an
independent company. Recently, for example, Alexion Pharmaceuticals, Inc. paid a 124
percent premium to buy Synageva BioPharma Corp. Although Synageva did not have a
product on the market at the time of the transaction, it was in late-stage development of
a promising treatment for a rare genetic disease. Alexion placed high value on both this
product and Synageva’s overall innovation capabilities, factors that influenced the deci-
sion to pay a premium. The following comment from Alexion’s CEO shows why the firm
paid a premium to acquire a particular company:“We think the valuation is appropriate because we
think Synageva is so much more valuable in
our hand than anyone else’s hands.”^9
This may in fact be the case. Overall though,
paying a premium that exceeds the value of a
target once integrated with the acquiring firm
can result in negative outcomes.^10
7-1a Mergers, Acquisitions, and Takeovers: What Are the Differences?
A merger is a strategy through which two
firms agree to integrate their operations on a
relatively coequal basis. A proposed merger
of equals between two Canadian mining
firms—Alamos Gold Inc. and AuRico Gold
Inc.—was announced in mid-2015. This
merger between two smaller miners was
being considered so the combined firms
could generate synergies through cost savings
and a joint focus on low-risk mining opera-
tions. Openly stating that the merger was
viewed by both firms as a merger of equals,
Alamos’ CEO stated that “the combination of
diversified production from three mines and
a pipeline of low-cost growth projects in safeA merger is a strategy
through which two firms
agree to integrate their
operations on a relatively
coequal basis.