Mergers and Acquisitions: How Good Are They?
April 18, 2010 12 Comments
Many failed mergers and acquisitions made me think why the organizations take these crucial steps. Mergers and acquisitions consume a lot of time and effort from both organizations. I always liked Peter Drucker’s writings and find his style and views fascinating. Drucker (2004) suggest that a successful acquisition should not be based on financial strategy, but should be founded on business strategy like the numerous acquisitions done by GE under Jack Welsh’s leadership. The acquirer must contribute to the acquisition, not the opposite (Drucker, 2004). The acquirer should be able to support the acquired firm and set up plans to restructure, reorganize or financially support the firm. The acquirer should provide top management for the acquired firm within maximum of one year from the acquisition (Drucker, 2004). Palepu & Healy (2008) suggest earnings multiples and discounted cash flows as valid methods to check the intended firm’s attractively for acquisition.
Corporate restructuring is used for different motives but Stewart & Glassman (2001) explain that “achieving a better business fit”, “achieving a higher-valued use of assets” and “strengthening incentives” are some of the main reasons for corporate restructuring. Boston Consulting Group (BCG) is known for the popular matrix which recommends transferring income from the “cash cows” to the promising “question marks” without restructuring the firm (Stewart & Glassman, 2001). However, Stewart & Glassman (2001) stock analysis found that separating “cash cows” from “question marks” create more stock value especially if the profit from the “cash cows” is passed to the investors.
Drucker, P. (2004). The daily drucker: 366 days of insight and motivation for getting the right things done. New York: Harper Business.
Palepu, K., & Healy, P. (2008). Business analysis & valuation: using financial statements (4th ed.). Mason, OH: South-Western.
Stewart, G., & Glassman, D. (2001). The motives and methods of corporate restructuring. In The new corporate finance: where theory meets practice (pp. 529-543). New York: McGraw-Hill/Irwin.