In recent years, few business topics have commanded as much research and media attention as mergers and acquisitions, perhaps because of the sheer volume of M&A activity: the value of U.S. merger activity equaled around 16% of GDP in 1999 (Bengt Holmstrom and Steven Kaplan, 2001), and the value of M&A worldwide reached a peak of $3.5 trillion in 2000 (Economist, January 27, 2001).
Over the past 40 years, economic theory has provided many rationales —positive and negative — for why firms choose to engage in mergers and acquisitions. For example, acquirers may be seeking to improve efficiency or create market power, or be reacting to deregulation; in other cases, diversification or empire building may be the goal — possibly spurred by managerial hubris. Indeed, empirical research has shown that most of these theories can explain certain types of merger activity, though some theories appear to be more relevant for particular time periods. That is, the 1960s were characterized by diversifying mergers, the 1980s are referred to now as the decade of market discipline, and the 1990s were dominated by deregulation.
Much of the academic and anecdotal research has focused on this crucial question: Do mergers and acquisitions create value? Interestingly, the answer is not clear. Whether acquisitions create value depends on various factors: how value improvements are measured (using short-run or long-run stock performance, or... To read the complete article, login or sign-up using the form below.
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