Merge and acquisition actually create value or not?

Merge and acquisition (M& A) is one part of the Foreign Direct Investment (FID), the topic I mentioned last week. Merging activity is the creation of a new organization out of two or more organizatons of more or less equal stature, pooling all resources. Meanwhile, acquisition is the activity of adding a small firm into the existing structure of a large organization.

Merge and acquisition becomes a trend with an increasing in number up to 74,000 acquisitions between 1996 and 2001. It is predicted to continuing increasing in future (Quittner, 2008). The deal bases on the market price, and can be risky, and usually aim to increase sales, cut costs.

The purpose above totally was achieved in case of J. P. Morgan and Chase Manhattan Bank. Although the merge was not equal as it planned, it can not be denied the effective result as the company ranked second in size of assests among all American banks.

However, it is not always successful in every case of merge and acquisition. Author Quittner (2008) states that around 50% of acquisition  companies will have failed. A fail example is the case of Cocal-Cola and Proctor and Gamble, in which after 5 months of acquisition, Coca-Cola’s stock had dropped and Proctor and Gamble’s share price risen. Or the Daimler-Chrysler partnership lost the two firms $60 billion of market value

Another obvious example is America Online (AOL) merged with Time Warner at the value of $164 billion (Quinton, 2000). It is overoptimistic when the two organizations set an aggressive goal of 30% growth rate. In positive situation, Time Warner shareholders will get 1.5 shares of AOL for each share they own; at the end of January, the spread between Time Warner's price of $80 and the value of 1.5 AOL shares was about 7%. But if the deal collapses, Time Warner stock could fall more than 17% to its pre-deal price, while the growth investors who have fled AOL would presumably return, pushing it over $70, or more than 20% higher (Galarza, 2000).

In fact, it is recorded that AOL Time Warner worth $54 billion after the merge. A professional analyst Ethan McAfee questioned why AOL made that decision as “their investors buy the stock only because of its growth”.

So, I myself wonder whether merge and acquisition create value or not? Merge and acquisition brings benefits or drawbacks to firms?

According to a report by Schweiger (2002), trillions of dollars in deals have been struck and tens of millions of people have been affected. In the view of financial measures (profit or stock price) or non- financial measures (firm reputation), M&As creates no gain or even a slight loss in both stock price and profit (Schweiger, 2002). M&As also has a negative impact in employees. Thousands or eve tens of thousands people are being unemployed due to the M&As. Studies demonstrate the affects of M&As on employees’ health, stress, loyalty to their organization, productivity, absenteeism.

It is said that organizations must have a careful considerations before making decisions of M&As. There are some factors that managers may concern like the type of resources to be combined, the synergies sought, the extent of redundant resources, the degree of market uncertainty and the level of competition faced.