india going global.indd - The IIPM Think Tank

MERGERS & ACQUISITIONS
Introduction:
Corporate entities are viewed as vehicles of value maximization
for investors. Yet, they are also means of achieving
diverse goals of different stakeholders. Viewed from this
perspective, the objectives of mergers and acquisitions
have been examined and studied as tools of achieving a
number of different yet related objectives. Baumol (1967)
and Mueller (1969) found merger and acquisition activity
as a means of empire building. Shleifer and Vishny (1989)
observed it to be a means of management entrenchment.
Likewise mergers have been resorted to for enhancing
monopoly power (Mueller, 1993); to improve the performance
of an entity/target perceived to be underperforming
(Roll, 1986). However, from the stand point
of a world view that resources are limited and only the
fittest can survive, the appropriate paradigm explaining
merger and acquisition activity will be Efficiency Theory
of Firms. The theory states that only efficient firms will
survive and inefficient firms will be taken over (Manne,
1965; Mead, 1968; Jensen, 1988).The issue has assumed
great significance in emerging economies in view of rising
trend in them towards M & A.
Theoretical and empirical research on motivations
for mergers and acquisitions has identified a number of
factors such as reduction in costs (Coase, 1937), elimination
of hold up problems (Williamson, 1979), mitigation
of uncertainties in market transactions (Klein,
Crawford and Alchian, 1979), risk aversion (Blair and
Kaserman, 1978) and meeting the challenges posed
by price inflexibility (Carlton, 1979) and competition
(Perry, 1989). These factors collectively constitute the
effort to overcome internal management hurdles and to
improve the efficiency. Studies on managerial performance
have revealed that often poor performance is the
consequence of managers deviating their focus from
long term value maximization and profitability (Rappaport,2002
). Deflection of the focus leads to decline
in the operating efficiency leading to poor performance
and non realization of the potential. Poor performance
in the presence of good resources and potential attracts
buyers/investors who believe that operating efficiency
and value can be increased if methods and techniques
of utilization of resources are improved. The acquiring
firms are propelled to buy the target with the objective of
transforming the operational landscape and practices to
bring about improved efficiency, by Mr. Jangoo input-output Dalalratios and
hence value. Another most Sr. VP-Enterprise, commonly cited Cisco managerial Systems (India & SAARC)
motivation for undertaking M&A is unlocking synergies
(Walter and Barney, 1990). Unlocking synergies means
creation of economic gains when assets are used more
effectively by the combined entity than by the target
and acquirer separately (Shelton, 1988). This occurs pri-
July-October - 2007 Need the Dough
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