How Merger and Acquisitions Create Value for the Shareholders of Financial Firms?

How merger and acquisitions create value for the shareholders of financial firms?

There are many hypotheses that try to explain the impact of merger and acquisitions on creation of value for the shareholders. Basically they can be divided into two major groups: value-maximizing and non-value-maximizing theories. The value-maximizing theory says that merger and acquisitions create value and positive synergy for shareholders of both bidding (buyer) company and target(seller) companies. It is considered that M&A always leads to the value creation for both companies. However the opposite hypotheses state that in merger and acquisitions the shareholder wealth of the bidder company always drops, while the shareholder wealth of the target company increases. In other words there is no 100 percent certainty that the synergy, or value creation will appear after the merger. The main aim of merger in this case is sales and growth-maximization. The managers pursue their own gain in expense to the shareholder wealth. Muellar (1967) suggests that the management of the bidder companies try to control the decison-making process so that it could give high priority to the growth of the firm rather than its profit. Amihud and Lev (1981) also argue that with merger, which leads to a successful diversification and stabilizes the earnings of the firm, managers secure their income, which is highly related to the total risk of the company

In order to create value the management should take strategic actions in order to optimize the efficiency of the production capacity of the target company and to organize the cooperation of it with the bidder company. All this should be made with a careful attention to all external constraints and opportunities. The value can be created only if the management will be able to successfully

exploit the strenghts and minimize the weaknesses of merging companies, combining it with the effective use of environmental opportunities and constraints. Many theories tried to explain factors that affect the value creation for meging companies. There are several factors that can be considered the most important: market power, economies of scale, economies of scope, coinsurance and financial diversification.

Synergy (value creation) exists when the total value of two companies after they merge exceeds the sum of values of this companies