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Q: firms and corporations....Omnivorous-GA ( Answered 4 out of 5 stars,   1 Comment )
Subject: firms and corporations....Omnivorous-GA
Category: Business and Money > Finance
Asked by: secured-ga
List Price: $20.00
Posted: 11 Sep 2005 21:43 PDT
Expires: 11 Oct 2005 21:43 PDT
Question ID: 566993
Many corporate acquisitions result in losses to the acquiring firms'
stockholders. Accordingly, why do firms purchase other corporations?
Are they simply paying too much for the acquired corporation? A
co-worker asks your opinion. Specifically state the reasons for your

Request for Question Clarification by omnivorous-ga on 12 Sep 2005 13:46 PDT
Secured --

This is actually a tough question, as there are many reasons for
acquisitions -- and it depends on point-of-view.  In James Stewart's
book, "Den of Thieves," he contends that several corporate
acquisitions were made to get control of well-funded pension funds.

The classical finance answer is "to maximize shareholder value."  Is
this the viewpoint that you'd like?

But there have been some interesting merger & acquisition studies done
-- and there are typically about a half-dozen other reasons cited. 
Would you perhaps like those?

Best regards,


Clarification of Question by secured-ga on 12 Sep 2005 19:38 PDT
yes lets shoot for confuses me too thats why i came to you
lol..back to monday night football and paperwork

Subject: Re: firms and corporations....Omnivorous-GA
Answered By: omnivorous-ga on 13 Sep 2005 10:39 PDT
Rated:4 out of 5 stars
Ryan ?

The classical answer to this question is ?to maximize shareholder
value.?  But your customers are likely to hear that phrase as ?they?re
overcharging us for everything they sell.?  And employees are not
likely to relate to that either.

Indeed, a friend and fellow graduate from the University of Chicago?s
Graduate School of Business is an executive at a major newspaper. 
?When I was on the delivery loading dock, I found out that the guys
down there didn?t care about the same things,? he told me one day. 
And ?maximizing shareholder value? was one of the things they didn?t
care much about . . .

A number of studies have been done on merger success.  They use the
?shareholder value? method to evaluate the success but look at other
reasons.  A fairly recent study by KPMG International, the accounting
and consulting firm, maintained that 40-70% of mergers fail.

The reasons for the mergers were cited as:
?	entering new geographical markets ? 35%
?	increasing product/market share ? 19%
?	acquiring new products & services ? 8%
?	integration of supply chain (both backwards and forwards) ? 7%
?	maximizing shareholder value (there it is again!) ? 20%
?	other ? 11%

NYU Stern School of Business
"Unlocking Shareholder Value: The Keys to Success" (Novvember, 1999)


Why is the firm doing this?  What do you tell fellow employees? 

It?s doing it so that the company can grow profitability.  That means
increased opportunity for employees and managers.  And if the firm is
managed properly by the executives, it leads to increased
profitability for the shareholders as well.

Business managers are taught early that control of costs is a major
responsibility.  But one of the most-effective ways of controlling
costs ? whether they?re overhead costs or cost-of-capital ? is to make
sure that the firm is growing and reducing the percentage of cost for
every category.  The growth and consolidation imperative is so strong
that Wall Street analysts continually review business sectors and try
to predict winners in consolidation phases of an industry --

Ziff-Davis CIO Insight
?Book Review: Grow or Die!? (Brown, Oct. 2003)


Why do mergers & acquisitions (M&A) fail?

In the KPMG study of more than 700 mergers, it cited several reasons for failure:
?	lack of adequate pre-deal evaluations or ?due diligence.?  They
included legal and financing details in this.
?	lack of experience in M&A
?	quick and effective selection of a management team to run the
merging of business activities
?	early resolution of cultural issues in the way the 2 companies ran their business
?	poor communications with employees, suppliers, customers and shareholders

The KPMG study is backed up by others, including one by Harbir Singh
of Wharton on the financial industry.

WhartonFinancial Institutions Center
"Pursuing Value in Financial Services"

Singh concentrates on success factors, which of course sheds
light on the failures too.    His first two conclusions match those of
the KPMG study:
? Mergers work best when companies had significant merger experience. 
One of the reasons that U.S. and U.K. firms were more successful in
the KPMG study was that they simply did it more often.
* The management team is key, Singh finding that when the "target's"
management is replaced it is a negative due to disruption of the
* Systems integration is a positive in reducing costs, with a
stronger effect in insurance companies than in banks.


Poor management of people is one of the attributes that the Deputy
Director of the National Bank of Greece, Maria Kouli, says is at work
in merger failures (you may have to register with MCE to see this study):

Management Centre Europe
"Why Do Mergers & Acquisitions Fail to Create Synergy?"  (Kouli, August, 2001)


Prof. Paul C. Godfrey, of the Marriott School of Business at Brigham
Young University, summarizes the results of 21 studies on the topic,
including a key Booz Allen study that shows where strategy
implementation fails.  

Godfrey says that strategy formulation fails the merger is defensive
or done to block a threat to the business.  The strategy also fails
when the merger is done because it?s ?what everyone else is doing.? 
And finally, strategies fail when there?s no clear objective.

In addition, Godfrey notes that the merger process fails in 4 ways:
1.	by not keeping key people
2.	due to delays
3.	because of incompatible cultures
4.	poor personal chemistry between chief executive officers of the two companies

Brigham Young University
"How Mergers Go Wrong," (Godfrey, undated)

Google search strategy
business ?grow or die?
?mergers and acquisitions? strategy

Best regards,

secured-ga rated this answer:4 out of 5 stars

Subject: Re: firms and corporations....Omnivorous-GA
From: frde-ga on 13 Sep 2005 04:27 PDT
The people running companies are supposed to be aiming to 'maximize
shareholder value'
- of course this is arrant nonsense
- CEOs and their pals are human beings, they are in it for themselves
  (this is called 'psychological egotism' 
    - there is no such thing as pure altruism )
- they have a whole bundle of motives, it can be money, power, a
stepping stone, their motives are as complex as anyone elses - perhaps
more so.

If anything the shareholders are rather a nuisance, any CEO with one
grey cell knows that the shareholders would physically sell him to the
dog food factory at the drop of a hat - let alone selling their stock
to a predator.

The CEO's problem is to keep the shareholders happy.

Companies often merge or take over other companies to avoid being
taken over themselves.

Companies sometimes have large cash reserves that they do not wish to
even disclose to the shareholders, let alone distribute, so they take
over other companies to get rid of the funds - this sounds daft, but
distributing a large dividend means that you are expected to
distribute even more next year, and if you don't you are in for the

There are also companies run by lunatics who honestly believe that
they can buy up all sorts of junk and make it work.

It goes without saying that the CEO of a $2b turnover company is paid
more and a 'bigger fish' than the CEO of a 1bn company.

Some companies actually /want/ to be taken over, the CEO prefers a
Golden Parachute to cement boots - especially if he knows that they
are in big trouble.
Then they will 'windowdress the books' and court the purchaser
- if the purchaser is not careful they will buy a pup - like BMW with Rover

There are other cases when a CEO and his buddies will actually make a
good business look bad to depress the share price so that the
purchaser is suitably grateful - very handy if selling to a Private
Equity entity. But that is a digression.

Analysts and their parent stockbrokers have a vested interest in
hypeing up companies, CEOs are only human, and they can easily fall
for a revolving door con and buy a pup at an inflated price in the
mistaken belief that they are buying a foothold in 'The New New Thing'

Companies that are in trouble, but still have a good share price,
because people have not yet cottoned on, can be tempted to buy
themselves out of trouble by snapping up potential 'nice little

Another problem is good companies buying up 'tarted up dogs'
(Morrisons and Safeways) finding problems and getting it in the neck
from the press and the shareholders - simply because they have not
turned things round in an instant.

The list is endless 
- but it helps to remember that con men are easy to con.
- also that humans are venal

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