1. According to practical studies, the major factors behind M&A activity are
a. Synergy which basically leads to generate incremental cashflows for both companies. Due
to M&A activity we will do addition in order to count their actual market valuation. Their
combine valuation will obviously exceed their standalone valuation. They can achieve
synergy in mainly two ways
i. Operating synergy – with the help of economies of scale their total fixed will
reduce as production volume will increase. Also, with the help of economies of
scope they can utilise same set of skills/assets to produce more products.
ii. Financial synergy – with the help of M&A acquirer’s cost of capital will reduce if
the new firm experiences lower overall transaction costs in raising capital and a
better matching of investment opportunities with internally generated funds.
b. Diversification – both the firms will try to do expansion from its current line of product.
However sometimes it helps to increase their overall growth and sometimes not.
c. Strategic realignment – In order to be ready for external environmental changes the firm
may adopt some strategic changes by shifting their focus from primary business to
another due to changes in regulations & technological advancement.
d. Hubris and the “Winner’s Curse” – sometimes manager who successfully acquire good
firms in past will pay more prices for the process of acquisition because of their
overconfidence. (They think the firm is currently not accurately priced)
e. Acquiring undervalued assets – sometimes firm choose to buy a firm just to replace their
current assets instead of buying brand new from market.
f. Agency problems – it is simply conflict of interest between managers & shareholders.
sometimes many young managers tend to acquire more firms just add the value in the
