The Dynamics of Merger and Acquisition

Summary of:

"The Dynamics of Merger and Acquisition Waves: A Three Conceptual Framework with implication for Practice" by Ellen R. Auster and Mark L. Sirower - Journal of Applied Behavioral Science 2002

This article studies the movements, tendencies and implication of merger and acquisition waves in the past years. Understanding how these waves were created brought to light industries reorganization, corporate strategy realignment, culture transformation and employees' life effect.

The authors observed that during a specific time M&A operations increased in many industries during certain period, and then they declined very rapidly. And also, many companies were involved in M&A without experience to guide a successful operation and integration as well. In the academic side, drivers for M&A activities are: economic efficiency, managerial self-interest and market for corporate control. But they actually do not explain why and how the waves were created in the past. In the other hand, executives used M&A, mainly, to improve companies' performance, and this very often does not happen. Target companies could create more value to its shareholders in a long term, and acquirer companies reveal that negative returns took place in most of the cases, and destroyed companies' value.

In order to explain this phenomenon, the article's authors proposed the three-stage conceptual framework - development, diffusion and dissipation.

In the first stage, development, macro and competitive factors designed the waves. Factors like deregulation, massive technological and telecommunication change, new information technology explosion, influenced companies to decide for M&A strategy to give a response about their market position. For instance, these elements combined with the uncertainty factor triggered the last two waves, which the changes in many fields (social, economic, geographic) were so fast and intense that managers were not able to answer to the current competitive environment and then decided that a merger might be a "quick and easy" solution to their problems.

Some successful M&A in the 1980s wave also influenced other companies to use the same strategy to increase profitability and competitiveness. And during the initial legitimization in this wave, many companies were funding by debt, what made possible that any size companies could be part of the M&A movement. In the 1990s, the most of the acquisition used the stock market as a funding mode.

Diffusion is the second stage of authors' conceptual framework. After the first stage is set up, with the interaction of macro dynamics and isomorphic process, which resulted additional legitimacy to continues the wave's movement.

In most of the cases, companies decided for M&A strategy with limited information, but they were encouraged by all the benefits a merger operation can bring into their business. Another factor that motivated