Mergers and acquisitions, more commonly known as M&A, are components of corporate finance that refer to the buying and combining of independent companies. When one company takes over another it is known as an acquisition or more simply, one company acquires another. Mergers are when two companies agree to form a single company voluntarily. As for the market for corporate control this is essentially the market for acquisitions and mergers where there is active competition for control rights in the form of voting stock. This process is co-ordinated through the mechanism of a regulated and transparent stock exchange. On a daily basis deals are arranged that can have a lasting effect on the stakeholders involved, dictating the fortunes of the respective companies for years to come. High value transactions have regularly made headlines around the world in the past with many well-known brands having been resigned to history at the conclusion of deals. In the merger of Continental Airlines and United Airlines, the Continental brand name, while although world renowned has been discontinued in favour of a consolidation of the new company’s brand architecture. The predominant reasoning behind a takeover, be it friendly or hostile, is the belief that shareholder value would be increased if two companies were to operate synergistically as one, exceeding the value of the two separate companies when combined through added efficiency, increased market share and improved economies of scale. In the wake of the financial crisis companies sought to consolidate their positions at a time of economic uncertainty, looking to M&A as a means to safeguard shareholder interests. In this piece I will examine recent trends in M&A activity and the role of the market for corporate control.
If mergers and acquisitions are to improve shareholder value than they must increase the financial performance of the two companies when combined. There are numerous motivating factors that can improve financial performance post-transaction, the most commonly touted of these being economies of scale and scope. Economies of scale refers to the cost advantages of expanding the scale of an enterprises operations or outputs. By combining the operations of two companies that endure the same costs, say for example fuel in two haulage companies, this long run concept stipulates that by joining forces the cost per unit of fuel could be improved by increased bargaining power as per Porters five forces (Porter 1979). While economies of scale refer to the production/use of a single product, economies of scope although conceptually similar but differ in that it is in reference to the reduction in the average costs of producing two or more products (Panzer and Willig 1977). The efficiency of a broad product range can be improved by offering a more complete product range to customers in a particular market. Heineken have regularly highlighted the benefits that come from economies of scope when adding new products to its brand family. Sales teams at Heineken distribute a range of products more cost effectively than smaller competitors with a single product. Equally by adding a new product to its portfolio the company gained access to a set of customers that could be then be exposed to the entire breath of Heineken own brands, thus maximises consumer lifetime value. Economies of scope are a necessary condition for a natural monopoly to flourish.
The period 1965-1989 saw a string of large conglomerates seeking a diverse span of subsidiaries across an array of industries in the hope of hedging out cyclical downturns in their portfolios. What resulted were bloated and unrefined conglomerates that were unprepared to fully commit resources to industries that their executive leadership did not fully understand. From the 1990’s on this trend changed as companies were now more inclined to acquire those in similar industries to themselves, thus complementing the products/services that they already provided. In recent years there have been few general trends to apply to all industries but more industry specific trends that are driven by opposing priorities. For instance the airline industry has been transformed by the emergence of ‘super airlines’ whereby large legacy carriers have merged or been acquired to maximise cost efficiency. Beginning in the Europe with Air France-KLM in 2004 a string of mergers have followed including Delta-Northwestern, United-Continental and finally British Airways-Iberia in 2011. In the technology realm companies such as Google and Microsoft are constantly acquiring small start-ups in the hope of capturing the knowledge capital that was responsible for creating these fledgling companies. While Google is still very interested in developing the software assets and patents that these small start-ups possess it is the talent behind them that they really desire, an understandable approach if high levels of innovation are to be sustained.
The market for corporate control along with competition in the markets for products and services play an important role in reinforcing each other in promoting efficiency (OECD 1993). This theory calls for a complete deregulation of the markets under its assumption that the efficient market hypothesis holds true, controlling excesses and generating economic value. However I have found it difficult to fully justify such a stance when one considers recent developments such as LBO’s and their impact on stakeholders. I think it is more prudent to view the market for corporate control with scepticism because of it inconsistencies and its failure to comprehensively deal with the problem of information asymmetry. The theory of the market for corporate control cannot resolve principal-agent problems and that, on the contrary, mergers and acquisitions are manifestations of acts of agency that can exacerbate contradictions between management and shareholders(OECD 2003).
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