3.Discuss the general motives for M&A. Using the example of Mueller and Sirower (2002) demonstrate how researchers may distinguish between these motives.
In the first part of the essay, four motives for M&A are summarized and analyzed: the Synergy Hypothesis, the Managerial Discretion Hypothesis, the Market for Corporate Control Hypothesis and the Hubris Hypothesis. Then, in the next part, Mueller and Sirower’s methodology of discerning these motives will be discussed.
1. General motives for M&A
1.1 The Synergy Hypothesis
1960s the word synergy was described gains from conglomerate mergers that could not be readily identified, but were presumed to explain why the mergers occurred. Bringing two companies together can produce gains for both parties and the economy can be achieved:that is “2 + 2 =5”. Synergies can be embodied in the following aspects: Cost savings, revenue enhancement, process improvement, financial synergies and tax reduction synergies. First, cost savings could be achieved . To be more specific, mergers can result in fixed cost reduction because of the better utilisation of fixed assets in same use (economies of scale) or different use (economies of scope). Redundant functions in general, sales, administrative expenses can be eliminated. Transaction costs in supply chain can be reduced through improved control and elimination of intermediaries. Besides, variable cost can also be reduced through lower input costs and improved productivity. Second, revenue can be enhanced. After mergers, companies could gain a stonger market power though the elimination of competition. They can realize mutual complementarity of advantages through complementary channels serving different markets, customers or technologies. They can also provide broader range of offerings. Mergers also make it easier to increase each products sales or extend product life or bring in new products. Third, mergers can result in process improvement. Companies’ core competences such as brands, technology, knowledge and management can be transfered after the merger. Fourth, companies pursue the financial synergies after mergers. Companies could generate less risky income stream if their correlation less that perfect and also reduce tax burden with the use of interest bearing debt. Finally, tax reduction synergies can be realized because depreciation tax could shield following purchase and losses can be transfered between firms.
1.2 The Managerial Discretion Hypothesis
If the agent problems allow managers to pursue their own goals to some extent, and these goals are related to the growth of the firm, then managers may pursue this goal by acquiring other firmsat even at the expense of profit, because this is the fastest way to grow (Mueller, 1969).
1.3 The Market-for Corporate-Control Hypothesis
The market for corporate control motive has been first proposed by Manne (1965). The hypothesis states that a firm is undervalued due to inefficient management and that any bidder can detect this, acquire that firm and replace the manager. Thus, such a market operates efficiently in eliminating managers who either pursue goals that do not go into the shareholders’ interests, or are simply incompetent. Under the MCCH, if the bidder who obtains the target replaces the original manager with a better one, the target could increase its value from the current level to a high value.
1.4 The Hubris Hypothesis
This merger driver was first proposed by Roll (1986). The hypothesis states that managers incorrectly believe to be better able to manage other companies. That is, There is a gain to be made from acquiring company, but bidders are uncertain about the size of this gain, they are overconfident in their managerial abilities and end up overpaying for a target which makes the acquiring firm suffer a loss. In fact, it has been argued that the hubris consequence is equivalent to the winner’s curse in common value auctions, namely, bidders overpay for the auctioned
