MERGERS AND ACQUISITIONS
Table of Contents
Background and motivation 3
Objective or aim of this literature review 4
Findings from current available literature 4
Issues from current research 5
Contribution to current literature and stakeholders 5
Section One 6
Motivation of M&A’s 6
Agency theory 7
Relationship between motives and financing 8
Section Two 9
Payment methods 9
Financing hierarchy vs. market conditions 9
Differing views on leverage 10
Valuation and the agency problem 10
Managerial ownership 11
Section Three 12
Performance of mergers and acquisitions 12
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This steep increase in M&A activity has led to an increase in relevant studies and literature, as investors and scholars attempt to discover their motivations and performances. As the market for M&A’s continues to grow, there will be a greater need for further research to allow the participating firms, as well as investors to optimise their returns.
Many firms view M&A’s as a mean of wealth creation, by expanding their size through acquisition of other firms. However, data shows that 70% of takeovers result in a negative wealth effect on acquiring firms. To further discuss the contradiction in motive and results, this paper will examine the various factors that impact the outcome of M&A’s. Firstly, the motive of an acquisition shapes the goal and approach adopted by bidding firm, whilst the choice of payment method is a major factors in determining the overall success of a M&A. Finally, literature regarding post acquisition results will be analysed to identify the relationship between results and the bidding firms approach.
Objective or aim of this literature review
This literature review aims to investigate the value of M&A’s to target and bidding firms, and critique how the decision making process effects wealth creation of shareholders. By comparing and contrasting the literature available in regards to M&A motivations and method’s of payment, this review will determine the strengths and weaknesses of existing studies. Finally, this review will point out the gaps in existing literature and suggest possible areas of future research.
Findings from current available literature
In all M&A’s, research shows that there tends to be a significant relationship between the motives of the bidding firm (what the bidding firm wants to achieve), and the approach taken by this firm. Past studies show that the three main motives for M&A’s are synergy, agency theory, and hubris, all of which coexist in many M&A transactions. Past research has shown there to be differing views on how each of these motives affect the performance of the transaction. The method of payment for an M&A’s also has a direct effect on whether wealth is created throughout the transaction. Existing literature is very specialized and generally looks at only one or two factors when discussing what may be the correct method of payment. There tends to be a lack of general research, with many scholars contradicting each other’s research in this area. This suggests that the method of payment for an M&A is very subjective and firm specific. Studies also show that there is no common conclusion regarding the study of M&A performance because of different methodology, regions and period of M&A. Past literature has had mixed results in determining the influencing factors for M&A performance because most studies only inspected the short-term changes. There has been a lack of long-term follow-up studies to determine the true...