Tuesday, 23 May 2017

Mergers and Acquisitions (2)

Acquisitions rarely create value unless they do one or more of the following:

  1. improve performance of the target company,
  2. remove excess capacity,
  3. create market access for the acquirer's or target's products,
  4. acquire skills or technologies at a lower cost and/or more quickly than could be done without the acquisition,
  5. exploit a business's industry-specific scalability, and
  6. pick winners early.

Most of the value of an acquisition goes to the target's shareholders unless one or more of the following hold for the acquirer:

  1. it had strong performance before the acquisition,
  2. it can pay a low premium,
  3. it had fewer competitors in the bidding process, and 
  4. the acquired assets were from a private firm or a subsidiary of a large company.

Value Created for Acquirer

The value created for the acquirer is:

Value Created for Acquirer
= (Stand-Alone Value of Target + Value of Performance Improvements) - (Market Value of Target + Acquisition Premium).

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