Mergers and Acquisitions: Shareholders Worst Nightmare?

Mergers and acquisitions are an interesting concept when linked to shareholder wealth.  With much of the emphasis on businesses based around maximising the wealth of shareholders, you have to ask how exactly mergers and acquisitions achieve this for the bidding company.  Looking at Jensen and Ruback’s study, rarely do you observe any significant gain for the bidding shareholder’s company.  If the bid fails, it can be expected that both sets of shareholders will see a loss.

Looking at the recent case of JD looking to takeover JJB, the initial announcement from JD stating their intentions was met with JJB’s shares rising over 30%, whereas JD’s shares rose a modest 1.5%.  Evidently, JJB’s shareholders saw this as a far more exciting prospect than that of JD’s. 

 As a shareholder, Warren Buffet seems to meet mergers and acquisitions with a degree of hostility, citing the loss of wealth on the acquiring shareholders to be a key reason.  It seems JD’s shareholders have a similar opinion.  Why would they wish for their company to shell out for a target company’s shares at a massive premium rate? 

Mergers and acquisitions seem to display an area of business where the objectives of shareholders and management differ.  Some of the pro-M&A arguments revolve around the cliché lines of ‘increased efficiencies’ and ‘synergy benefits’, but looking into quotes from John Kay, there seem to be a degree of egoism from management.  “The thrill of the chase” is an irresponsible mentality from managers tasked with the duty of maximising the wealth of the shareholders.  With Buffet’s analogy of ‘frogs to princes’, the cynicism shareholders can hold towards M&A’s to be evident.

Of course there can be genuine advantages involved for businesses if made correctly.  For companies looking to expand their operations to other countries, investing in an already established framework can save a considerable amount of time and money that starting from scratch.  Wallmart’s takeover of Asda is a great example of how to expand to other countries, and with Tesco’s faltering attempting to start from scratch in America; it shows that M&A’s are not always a bad thing.

Coopers and Lybrand saw the significant causes of merger failure to be based around the differing cultures of organisations- with possible hostility being created between the two companies, and a lack of planning post-acquisition.  Astonishing to think that some companies can be so blasé when it comes to assuming the chase is the difficult part.  A lack of planning causing failure is inexcusable and egotistical.

With it coming to light just a few days ago that JD have pulled out of the JJB takeover, and JJB quoted as saying that JD’s bid plan “lacked certainty”, perhaps the takeover would have been met with the exact problems that have been observed in the past.  Maybe JD have dodged a bullet here, and looking at their share price rising by 5.3% compared to JJB’s fall of 10% after this announcement, it looks like JD’s shareholders are breathing a sigh of relief that they won’t have to be ‘kissing any frogs’ any time soon.