Thursday, February 28, 2013

Merger Motives

It has been said that there are as many motives for mergers as there are mergers.  While each merger is certainly unique, there are certainly common themes.  That said, a very partial (top of the head) list of (non-mutually exclusive) motives would include:

  • Synergies
  • Tax strategies
  • Market share
  • Eliminating a competitor
  • Expanding geographically
  • Expanding the product line
  • Acquiring Technology (ex. patents)
  • Utilizing management skills
  • Acquiring management skills
  • Merging defensively - (to prevent a competitor from doing the deal and getting an advantage)
  • Regulatory reasons
  • Strategic plans
  • Acquiring an undervalued firm
  • Acquiring a supplier or customer to improve quality/costs
  • Eliminate redundancy (two CFOs, etc.)
  • Take advantage of economies of scale 
  • Improve product distribution
  • Corporate diversification
  • Increasing debt capacity


There are several things to note about this list.  First, it can go on and on.  Indeed, in working with teams of executives I've frequently challenged each individual to come up with a motive for merger than hasn't been mentioned by one of their colleagues.  We can generally go to 20-30 motives before we start repeating and even then someone will mention a new idea. But as we go forward most ideas start to be nuances (subtle or blunt) of previous ideas.  

That is certainly the case with the brief list above.  So Second, the motives are overlapping.  For example, 'eliminating redundancies' and 'taking advantage of economies of scale' are both related and both can be considered as subcategories of 'synergies'. 

Third, there are two broad types of motives.  The first would be those motives related to shareholder wealth maximization.  Arguably, each of the motives listed above are rational attempts by management to improve shareholder value.  In practice, however, even well intentioned motives can lead to shareholder losses.  The distribution and reasons for those losses will be explored in future posts.  

But there is a second broad category of merger motives, not explicitly shown above: managerial motives.  These include:

  • Empire building
  • Acquiring to avoid being acquired
  • Paying too much to get the deal done
  • Hubris
  • Overconfidence
  • Merging to trigger golden parachutes
Empire building means expanding the size regardless of wealth effects and often falls under the guises of the earlier mentioned list of motives. Acquiring to avoid being acquired can be good or bad for shareholders.  If good (perhaps due to market misvaluation due to information asymmetry about the firm’s growth prospects between management and investors), shareholder wealth improves.  If bad (such as to preserve executive jobs) shareholder wealth declines.  Naturally, whether it is good or bad is arbitrated by management. Paying too much to get the deal done happens when executives get caught up in deal fever and overpay to win the deal.  (See our related posts on the Winner's Curse and AnyDeal is a Bad Deal at some price.)

Be careful with mergers – challenge all assumptions.  Ask why the same result cannot be achieved with internal growth.  Ask why any projected synergies are available.  Worry about the winner’s cures.  The moral of the story is that successful executives should think like the shareholders.  After all, they are the owners - it is their money being invested - or wasted.  

We'll follow up down the road with two related posts: catalysts for merger and merger waves.  In those posts we'll talk about the various factors that cause a firm - or an industry - to be in play.  We'll also look at the governance measures that can lead to better merger outcomes.  

All the best,


PS Thanks to Joe and also Adam Yore and Jan Jindra for helpful comments on an earlier draft of this post.

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