The Impact of Mergers and Acquisitions Result in Wealth Creation for Shareholders (Dissertation Sample)

Contents u

1.Executive Summary:  3

1.1 Introduction:  3

1.2 Research Background:  3

1.3 Theoretical Framework  5

1.3.1 The Agency Theory  6

1.3.2 The User Cost of Capital Theory  6

1.3.4 M&A and Overvalued Market Theory  6

1.3.5 Synergy Gain Theory  7

1.3.6 Hubris Theory  8

1.3.7 Shareholder wealth  8

1.4 Research Problem:  9

1.5 Research Question:  10

Chapter 2. Literature Review  11

2.1 Introduction  11

2.2 Background on M& A  11

2.3 M&A Value Creation  16

2.4. M& A challenges and Downside of Synergies  18

3.Research Methodology  20

3.1 Introduction  20

3.2 Research Philosophy: 21

Chapter 4. Results and Discussions  24

4.1 Introduction  24

4.2 Results from 30 M&A transactions and cases studies during the period of 2014-2019 selected Thomson Financial Securities Data (TFSD)  25

4.2.1 Multicollinearity Tests  25

4.2.2 Correlation Analysis  25

4.2.3 Regression Analysis Posts merger  27

4.3. Successful Mergers and Acquisitions  29

4.4 How shareholder value created in M&A  33

4.5 Failure factors  35

4.6 Conditions required in making M &A Successful and Failure  38

4.6.1 M&A failure and Hubris  40

4.6.2 Impact of organization structure on M&A failure or success 40

4.7Due Diligence and Successful Mergers and Acquisition  43

4.8 Is Shareholder value being the only measure of success?  44

Chapter 5. Conclusion and Recommendations  45

5.1 Conclusion  45

5.2 Recommendation 46

References  47

1.Executive Summary:
The purpose of this research is to examine if mergers and acquisitions result in wealth creation for shareholders and if they do under what circumstances result are positive and what factors cause negative results. In order to achieve this purpose this study attempts to examine the impact of mergers and acquisition on the returns in the short and long run of various corporation stocks and financial statements. Some of the key findings from this study is that the success of M&A is determined by due diligence, cultural and organizational integration, and effective communication. On the other hand, success is characterized by access to larger markets, easy access to skilled labor, tax advantages, synergy, economies of scale, reduced competition and reduced cost of doing business. In this case the acquirer is the main beneficiary of a merger.
1.1 Introduction:
This chapter presents the background information on M&A, the research objectives, key research questions, scope of the research, problems statement and intended contribution.
1.2 Research Background:
The terms merger and acquisition have been used interchangeably in many scenarios because they have similar meanings or intentions. Mergers and acquisition activities are transactions where two or more companies combine to become an entity. Mergers take place between more or less equal partners operating in the same or different industries. In a merger, one firm(acquirer) takes the business of another firm and the target ceases to exist and the acquiring firm continues. The acquirer stock continues to trade in the stock market. On the other hand, acquisition refers to a transaction where a substantially bigger company takes over another company's assets or shares to influence the management of the target company. In this case, all the firms lose corporate existence, their stocks are surrendered and new firm stock is issued.
According to Faccio & Masulis, (2005) most of the M&A are paid through stock purchases. Nonetheless, the greater the management’s confidence in the merger or acquisition, the more they are likely to pay for stocks in cash (Zhang , 2001)
According to Renneboog and Vansteenkiste, (2019) there are few if any true mergers since there is always a dominant party. Several researchers (Derrien, Frésard, Slabik, and Valta, 2017; Aggarwal and Garg, ( 2019); Renneboog and Vansteenkiste, (2019) ) have identified four key types of mergers; vertical, horizontal, concentric, and conglomerate mergers. These types of mergers are defined in the below.
Source (Aggarwal and Garg, ( 2019) )
* An example of a Vertical mergers is Tesco acquisition of Booker group,
* An example of Horizontal merger in the UK include Glaxo Wellcome and SmithKline Beecham merger to become GlaxoSmithKline.
* An example of conglomerate merger in the UK is the BT acquisition of EE Mobile group
* An example of a concentric merger is Google merger with Android.
There are varied reasons why companies engage in mergers and acquisitions. One of the key reasons why companies engage in M&A activities is to improve their financial performance increase market share, seek economies of scale, increase synergy, diversification, cost reductions, influence supply chains, and eliminate competition. These financial improvements arise from economies of scale where there are reduced costs of doing business in the combined entity, the economy of scope tax benefit, vertical integration, and resource transfer. There is also synergy where the combined company and use the expert professionals.
Thus, the motives behind mergers and acquisitions are that two companies together are more valuable than two separate entities. The key reasoning behind mergers and acquisitions is to create shareholder valuer over the two entities (Nyambura, 2014). This motive is essentially alluring to many companies. However, the results of most mergers and acquisitions are not the same for many companies. Some companies may have positive results( access to larger markets, easy access to skilled labor, tax advantages, synergy, economies of scale, reduced competition and reduced cost of doing business) while others may have negative results ( such as job losses, diseconomies of scale, less choice for consumers, higher prices, inefficiency in operation due to monopolistic power)( Derrien, Frésard, Slabik, and Valta, 2017).
1.3 Theoretical Framework
The theoretical framework used in this research introduces the reader to mergers and acquisition, and all the underlying issues that are related to this activity. To answer the research question, it is important to study all relevant literature and integrate them to form a theoretical framework. This background study provides key insights, motives, and current conditions in the market.
This theoretical also provides insights into why companies engage in M&A and the challenges of these activities. Nonetheless, the success and failure factors will be a key concept of this study.
1.3.1 The Agency Theory
This theory is concerned with the separation of interests between the managers and owners of a firm. Proponents of this theory suggest that the capital used by a firm is owned by the firms and in this case shareholders. The theory assumes that principals and agents of the firm are wealth seeking individual who are trying to maximize their own utility functions (Gauci Borda,2016). Thus, when managers are making decisions aimed at bringing benefits to themselves at the expense of shareholder, then the agency problem occurs. For instance, in some cases mergers may reduce the value of a bidding firm but management may continue to seeking a deal in order to achieve their own personal goals. A practical example of the agency theory is demonstrated in the HP-Autonomy Merger where managers(agents) acted contrary to the principals(expectations) leading to a failed merger.
1.3.2 The User Cost of Capital Theory
According to Livdan, and Nezlobin, (2017) this theory arises from the idea that the capital used by a given firm is owned but not rented by the firm that use it in their business transaction. Thus, any merger must ensure the continuous use of capital is enhanced and make decision that maximizes its use. However, of the limitation of this theory is that it does not take into consideration of the impact of expectation in capital. furthermore, it does not cater for the adjustment of the cost of capital.
1.3.4 M&A and Overvalued Market Theory
Proponents of this theory argue that M&A deals occur when the securities of the bidding firms are overvalued and those of the target firm are undervalued. Purina (2017) contends that this overvaluation may cause long-term gains to the shareholders. Similarly, Yaghoubi, Yaghoubi, Locke, and Gibb, (2016) states that the market overvalued theory explains merger and acquisitions better than most of the other theories, and this position was also supported by other scholars such as (Xu, Liang, and Song, 2018). According to Yaghoubi, Yaghoubi, Locke, and Gibb, (2016) close to 50% of all failed mergers are as a result of overvaluation of the target firms. The economy and industry level shocks, and managerial herding are some of the key factors that may influence these overvaluations. On average, market reaction to announcement of acquisitions is, somewhat negative for acquirer stocks and expressively positive for target stocks. 
1.3.5 Synergy Gain Theory
According to this theory, M&A is done to gain synergistic benefits out of their combined value (Alexandridis, Antypas, and Travlos, 2017). The value of this combined entity is greater than the target and bidding firms separately. The...