With the recent rise in corporate share prices, swelling cash accounts and a weak dollar, prognosticators are heralding the return of strong mergers and acquisitions activity, particularly in the high-tech, pharmaceutical and banking sectors. Yet if history provides any guide, many of these deals will fail to generate any real value for the shareholders of the acquiring company, and a good number will ultimately become wealth-destroying propositions.
New insights into why this happens have come from seemingly unrelated markets, including those for used cars, labor and insurance. In 2001, George A. Akerlof, A. Michael Spence and Joseph E. Stiglitz shared the Nobel Memorial Prize in Economic Sciences for their work on these markets and the failures that can arise when buyers and sellers possess different information about the goods or services being exchanged (Stiglitz, 2000). Strategic management researchers and financial economists have used these insights to understand why some M&As perform poorly and to identify ways that managers can cope with the challenges presented by knowledge discrepancies across bidders and targets.
The fundamental problem lies in two inherent features of many M&As: the acquiring company’s struggle to value the target’s resources and the need for the parties involved to agree on a price. The process of due diligence provides a useful starting point for obtaining detailed and reliable information about the quality of the resources to... To read the complete article, login or sign-up using the form below.
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