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Summary and Conclusions
Mergers and acquisitions are a popular way for firms to grow, and as economic globalization
continues, there is every reason to believe their size and frequency will increase. A 2008 study by
consulting and accounting firm Grant Thornton International found that 44% of all surveyed firms had
plans to grow by acquisition in the ensuing three years; that number rose to 60% for the rapidly
growing BRIC (Brazil, Russia, India, and China) countries. 18 However, it is not the case that profitable
growth by acquisition is easy. The empirical data presented in this chapter make it clear that corporate
combinations have historically often failed to meet the operational and financial expectations of the
acquiring firm‟s managers and shareholders. While target firm shareholders typically earn 30% to
40% premiums, M&A transactions do not create value on average for the acquirer‟s stockholders. This
information should make it clear that a carefully designed acquisition strategy, realistic estimates of
the potential synergies, and an efficient implementation plan are critical if the historical odds are to be
overcome.
Managers must understand that the only sources of incremental value in corporate mergers and
acquisitions are incremental future cash flows or reduced risk. These cash flows can come from
increased revenues, reduced costs, or tax savings. The sum of the potential value created from these
incremental cash flows is called synergy. For a deal to be successful financially, the premium paid and
the costs of the transaction must be less than the deal‟s total synergy. Only then will the bidder‟s
shareholders see their wealth increase. This sounds simple, but in a competitive market for corporate
control, there must be a relatively unique relationship between the bidder and the target that other
firms cannot easily match. The market must perceive the target as worth more as part of your firm
than alone or with some other firm.
There are many practical details that potentially impact the creation of value in M&A transactions.
These include the choice of payment (cash vs. stock), tax considerations, and antitrust concerns. Each
of these may affect future cash flows and synergies and therefore must be part of the premerger due
diligence process. We describe briefly how each factor can impact value creation, but refer potential
bidders to investment bankers, professional accountants, tax experts, and attorneys for the most timely
and customized advice.
The final and most important part of the process is the postmerger implementation plan. Managers
often focus on completing the transaction, which is unfortunate since the transition to a single
organization is where the keys to value creation lie. A detailed implementation plan must be
developed before the transaction closes and communicated quickly and effectively to employees by
the firm‟s new leadership. The plan must focus on the roots of synergy in the deal to ensure the
successful creation of the anticipated shareholder value. In deals where there are major cultural
differences, special attention must be paid to smoothly integrating these differences. Failure to do so
can doom an otherwise sound transaction.
In the end, profitable growth by acquisition is possible, but difficult. The market for corporate
control is competitive, and it is easy for bidders to overestimate potential synergies and therefore
overpay for acquisitions. To avoid this, managers must develop and stick to an acquisition plan that