How M&A Strategies Can Boost Shareholder Value
Abstract
The text explores alternative strategies for increasing shareholder value, identifying seven approaches ranging from solo ventures to financial and operational restructuring. A Multi-Criteria Decision Analysis (MCDA) framework is proposed to aid decision-making, assessing each strategy's alignment with the company's vision and mission. M&A is examined as a form of business reorganization, highlighting its benefits and challenges, emphasizing the need for effective implementation and monitoring. Anticipating M&A clusters is deemed crucial, given their cyclical nature, influenced by external shocks, financial conditions, and market valuations. The historical overview of M&A waves illustrates the importance of adaptability for firms. Empirical findings on M&A returns suggest significant benefits for target shareholders, while bidder returns vary situationally, with no clear superiority of alternative growth strategies. The study concludes with insights from Andrade, Mitchell, and Stafford (2001), emphasizing the complex dynamics and mixed effects of M&A on corporate performance and social welfare.
Time to Read: Approximately 8 to 10 minutes.
Level: Intermediate.
Category: Techical Note.
Alternative Ways of Increasing Shareholder Value
Shareholder value is the measure of how much a company's shareholders benefit from its actions and performance. Increasing shareholder value is a key objective for most companies, as it reflects their ability to create value for their owners and investors.
The main goal is to find the best strategy or combination of strategies that can increase shareholder value in the short-term and the long-term. This involves evaluating the costs and benefits of different options, as well as their alignment with the company's vision and mission.
After conducting a thorough analysis of the current situation of the company, it is evaluated its strengths, weaknesses, opportunities, and threats, so one or more than path could be mixed to reach an optimal solution.
We have identified seven alternative ways of increasing shareholder value. These are:
Solo venture: pursuing organic growth by investing in your own assets and capabilities.
Partnering: collaborating with other entities through marketing/distribution alliances, joint ventures, licensing, franchising, and equity investments.
Mergers and acquisitions (Business Reorganization): combining or acquiring the assets of another company to create synergies and economies of scale or scope.
Minority investments in other firms: acquiring a partial stake in another company to gain access to its resources or markets.
Asset swaps: exchanging assets with another company to optimize your portfolio or diversify our risk
Financial restructuring: changing the capital structure of your company to reduce the cost of capital or increase the leverage
Operational restructuring: changing the way you operate your business to improve efficiency, productivity, or profitability.
To decide which strategy or strategies to pursue, you could will use a multi-criteria decision analysis (MCDA) framework, which involves the following steps:
Define the criteria and sub-criteria that are relevant for your decision, such as financial performance, strategic fit, competitive advantage, risk, etc.
Assign weights to each criterion and sub-criterion according to their importance and priority.
Score each alternative strategy according to how well it meets each criterion and sub-criterion.
Calculate the weighted scores and rank the alternative strategies based on their total scores.
Perform a sensitivity analysis to test the robustness of the results under different scenarios and assumptions.
Based on the results, the most suitable strategy or strategies for increasing shareholder value recommendations typically are presented to the board of directors and the shareholders. It includes an implementation plan that outlines the steps, resources, timelines, and milestones for executing the chosen strategy or strategies., and how to monitor and evaluate the progress and outcomes of the implementation and report the results and feedback to the stakeholders.
M&A as a form of Business Reorganization
Corporate restructuring is the process of changing the organizational structure, operations, or finances of a company to improve its performance, competitiveness, or profitability. There are different types of corporate restructuring, depending on the focus and the goal of the change.
One type of corporate restructuring is balance sheet restructuring, which involves modifying the assets or liabilities of a company. This can be done by either focusing on assets only or liabilities only. For example, a company may sell some of its assets to raise cash or reduce debt, or it may issue new equity or debt to improve its capital structure.
Another type of corporate restructuring is operational restructuring, which involves changing the way a company conducts its business activities. This can include divestitures, widespread employee reduction, or reorganization of business units or functions. The aim is to increase efficiency, productivity, or profitability of the company. A common strategy for both balance sheet and operational restructuring is to redeploy assets, which means to use the existing assets of a company in a different or better way. One way to redeploy assets is through mergers and acquisitions (M&As), which involve combining or acquiring the assets of another company. M&As can also involve break-ups or spin-offs, which involve splitting or separating the assets of a company.
M&As can have various benefits for corporate restructuring, such as:
Achieving economies of scale or scope by combining complementary or similar assets
Enhancing market power or diversification by entering new markets or segments
Accessing new technologies or capabilities by acquiring innovative or specialized assets
Improving financial performance or stability by reducing costs or risks
However, M&As also have some challenges and risks, such as:
Integrating different cultures, systems, or processes
Managing complex legal, regulatory, or contractual issues
Facing resistance from stakeholders, such as shareholders, employees, or customers
Overpaying for or underutilizing the acquired assets
Therefore, deciding whether to pursue M&As as a form of corporate restructuring requires careful analysis and evaluation of the potential benefits and risks, as well as the alignment with the overall strategic goals and vision of the company. It also requires effective implementation and monitoring of the M&A process and outcomes, to ensure that the expected value is created and sustained.
The Importance of Anticipating M&A Clusters
Mergers and acquisitions (M&A) are strategic decisions that involve combining or acquiring the assets of another company. M&A activity tends to occur in clusters or waves, where periods of high M&A activity are followed by periods of low M&A activity. These waves are influenced by various factors, such as:
Shocks: These are external events that disrupt the status quo and create new opportunities or challenges for firms. Examples of shocks include technological change, deregulation, and escalating commodity prices. Shocks can trigger M&A waves by creating new sources of competitive advantage or disadvantage, or by altering the industry structure or dynamics.
Ample liquidity and low cost of capital: These are financial conditions that enable firms to access funds easily and cheaply. Examples of sources of liquidity and low cost of capital include low interest rates, high stock prices, and abundant credit. These conditions can facilitate M&A waves by lowering the financial barriers and increasing the financial incentives for M&A transactions.
Overvaluation of acquirer share prices relative to target share prices: This is a market condition that reflects the difference between the perceived and the intrinsic value of the shares of the acquirer and the target. When the acquirer's shares are overvalued relative to the target's shares, the acquirer can use its shares as a currency to acquire the target at a lower cost. This condition can stimulate M&A waves by making M&A deals more attractive and affordable for the acquirer.
Anticipating M&A waves is important for firms because it can have significant implications for their performance and survival. Some of the reasons why it is important to anticipate M&A waves are:
Financial markets reward firms pursuing promising opportunities early on and penalize those that follow later in the cycle. Firms that are proactive and innovative in identifying and exploiting M&A opportunities can gain a first-mover advantage and earn higher returns. Firms that are reactive and imitative in pursuing M&A opportunities can face a late-mover disadvantage and incur lower returns.
Acquisitions made early in the wave often earn substantially higher financial returns than those made later in the cycle. This is because early acquisitions tend to be more strategic and value-creating, while later acquisitions tend to be more defensive and value-destroying. Early acquisitions can enhance the acquirer's competitive position and market power, while later acquisitions can dilute the acquirer's focus and resources.
Therefore, anticipating M&A waves is crucial for firms to make optimal M&A decisions and achieve superior outcomes. Firms that can foresee and adapt to the changing M&A environment can gain a competitive edge and create value for their shareholders. Firms that fail to anticipate and respond to the M&A waves can lose their competitive advantage and destroy value for their shareholders.
Horizontal Consolidation (1897-1904): This was the first wave of mergers in the US, driven by the desire to reduce competition and increase market power. Companies merged with others in the same industry, creating monopolies or oligopolies. The wave ended due to the enactment of antitrust laws and the economic recession.
Increasing Concentration (1916-1929): This was the second wave of mergers, motivated by the need to increase market concentration and efficiency. Companies acquired or merged with others in related industries, creating vertical or horizontal integration. The wave ended due to the stock market crash and the Great Depression.
The Conglomerate Era (1965-1969): This was the third wave of mergers, characterized by the emergence of conglomerates. Companies diversified by acquiring or merging with others in different industries, creating unrelated or conglomerate diversification. The wave ended due to the oil crisis and the inflation.
The Retrenchment Era (1981-1989): This was the fourth wave of mergers, marked by the focus on core competencies and value creation. Companies divested or spun off unrelated businesses acquired during the conglomerate era, creating related or focused diversification. The wave ended due to the junk bond crisis and the savings and loan crisis.
Age of Strategic Megamerger (1992-2000): This was the fifth wave of mergers, fueled by the globalization and technological innovation. Companies pursued large-scale mergers with strategic partners to achieve growth and expansion. The wave ended due to the dot-com bubble and the 9/11 attacks.
Age of Cross Border and Horizontal Megamergers (2003-2007): This was the sixth wave of mergers, influenced by the deregulation and liberalization of markets. Companies engaged in significant cross-border and horizontal mergers to gain access to new markets and customers. The wave ended due to the global financial crisis and the credit crunch.
The Financial Crisis Wave (2008-2009): This was a short-lived wave of mergers and acquisitions that occurred during the global financial crisis and its aftermath. The main drivers of this wave were the need for survival, consolidation, and restructuring. Many deals involved distressed assets, government interventions, and bailouts. The wave ended due to the economic downturn and the credit crunch.
The Recovery Wave (2010-2014): This was a wave of mergers and acquisitions that emerged as the global economy recovered from the recession. The main drivers of this wave were the availability of cheap financing, the search for growth, and the emergence of new technologies. Many deals involved cross-border transactions, strategic alliances, and innovation. The wave ended due to the geopolitical uncertainties and the regulatory pressures.
The Mega-Deal Wave (2015-2019): This was a wave of mergers and acquisitions that featured record-breaking deal values and volumes. The main drivers of this wave were the low interest rates, the high stock prices, and the industry convergence. Many deals involved mega-mergers, industry consolidation, and digital transformation. The wave ended due to the trade wars, the pandemic, and the market volatility.
The Resilience Wave (2020-2023): This is the current wave of mergers and acquisitions that is driven by the need for resilience, adaptation, and sustainability in the post-pandemic world. The main drivers of this wave are the acceleration of digitalization, the shift to ESG (environmental, social, and governance) criteria, and the rise of SPACs (special purpose acquisition companies). Many deals involve technology, healthcare, and consumer sectors, as well as private equity and venture capital. The wave is expected to continue as the global economy rebounds and the M&A activity recovers.
The Impact of M&A Transactions on Shareholder Returns
The empirical literature on M&A returns has documented several stylized facts, such as:
Around the transaction announcement date, abnormal returns average 20% for target shareholders in “friendly” transactions; 30-35% in hostile transactions(*). This suggests that target shareholders benefit from M&A transactions, especially when they are unsolicited or contested by the acquirer.
Bidders’ shareholders on average earn zero to slightly negative returns(*). This implies that acquirers do not create value for their shareholders, or even destroy value by overpaying for the target or failing to realize synergies.
Positive abnormal returns to bidders often are situational and include the following:
Target is a private firm or a subsidiary of another firm. This may indicate that private targets are undervalued or have less information asymmetry than public targets.
The acquirer is relatively small. This may reflect that small acquirers have more growth opportunities or face less agency problems than large acquirers.
The target is small relative to the acquirer. This may suggest that small targets are easier to integrate or have more complementary assets than large targets.
Cash rather than equity is used to finance the transaction. This may signal that cash offers are more credible or less risky than equity offers.
Transaction occurs early in the M&A cycle. This may indicate that early acquirers have more bargaining power or face less competition than late acquirers.
No evidence that alternative strategies (e.g., solo ventures, alliances) to M&As are likely to be more successful. This implies that M&As are not inferior to other modes of growth or collaboration, and may have some advantages over them.
One of the most cited authors and papers that support these empirical findings is Andrade, Mitchell, and Stafford (2001) confirm the above-mentioned patterns and also examine the sources and consequences of M&A activity. They conclude that M&As are driven by industry shocks, market valuation, and managerial discretion, and have mixed effects on corporate performance and social welfare.
Reference
DePamphilis, Donald. Mergers, Acquisitions, and Other Restructuring Activities: An Integrated Approach to Process, Tools, Cases, and Solutions. 10th ed. Academic Press, 2019.
Recommended Reading to Learn More on Related Topics:
Gaughan, Patrick A. Mergers, Acquisitions, and Corporate Restructurings. 7th ed. Wiley Corporate F&A. Hoboken, NJ: John Wiley & Sons, 2018.
Lajoux, Alexandra Reed, and LLC Capital Expert Services. The Art of M&A, Fifth Edition: A Merger, Acquisition, and Buyout Guide. 5th ed. New York: McGraw-Hill Education, 2019.
