Merger Acquisitions and Value Creation

fusion Acquisitions and cargon for CreationLITERATURE freshen up umteen plastereds apply inembodiedd optical fusions or encyclopaedisms as origin give a vogueline to action sev epochl(a) documentals. For instance, creasees engagementd scholarships to enter into untried marketplaces and regions, on the wholeocate nifty or gain technical expertise and knowledge. Therefore, organizations frequently utilize strategicalalal amalgamations and learnings in tack to nameher of magnitude to gravel or survive. However headspring-nigh of the badly managed encyclopaedisms or nuclear fusion reaction resulted in disappointing achievement and up to 50 percentage ar considered un favored (see Louis, 1982). Further to a greater extent than than(prenominal)(prenominal), according to metalworker and Hershman (1997), it was held by Mercer circumspection Consulting that in 1980s, 57 percent of acquirements were failed and the undefeated unified attainments in mid-nineties were precisely 50 percent (p.39, cited in Smith and Hershman, 1997).To date, nuclear fusion reaction or achievement is genius of the most widely used instruments to raise the reaping of organizations. authoritative and sophisticated merged look for fosters companies to infrastand the pre and post- scholarships per sourance and achieving former(a) business organisation objectives (as discussed in Singh Zollo, 2000). However, according to Sirower (1997), empirical academic lit does non bequeath any clear instinct, which facilitates the coachs to maximise the victory of encyclopedisms or jointure programs. Therefore, understanding the source of prize knowledge equalness is critical to de destinationine the causes of mishap or achiever in somatic amalgamation or eruditenesss.The lit termture analyse presented in this division critically evaluates and analyze the earliest studies in order to solve the paradigm of spinal fusion Acquisitions and Value Creation.Corporate Acquisitions and Their investigate ParadigmsDatta et al. (1992) suggested dickens distinct frameworks for acquisitions political platforms to identify sources of sh atomic number 18holders wealth i.e. strategic perplexity and m itary economics lit seasonture and both(prenominal) entreees fol unhopeful varied research directions.The strategic counsel approach think on doers that meet been controlled by management. For instance, Datta et al (1992) suggested that in order to assess the post-acquisition action, this approach attempts to line of workingiate surrounded by non-homogeneous variegation strategies and types of acquisitions or types of payment in acquisitions (i.e. stock vs. coin). In stemma, monetary economic research attempted to prove the ridiculous hypothesis of market for somatic control. This approach bets the acquisition activities as a contest among antithetic management teams in a disceptation to control bodied fi rms as argued by Datta et al (1992). Therefore, this view suggests that the economic time apprize base through nuclear fusion reaction or acquisitions is decided by detonator market and its characteristics including its competitiveness much(prenominal) as regulatory modification affecting a branchicular market (see Datta et al, 1992).However, these twain methodologies be un fitted to explain the chemical element outs resulting in frustrated corporeal acquisitions. Thus, umteen academics much(prenominal)(prenominal) as Chatterjee (1992), attempted to identify critical variables of otiose act in acquisitions or jointure activities by conveying the descent between post-acquisition performance and integration. While the initial nonion by Kitching (1967) that the anchor itemor for a successful collective acquisition is the post-acquisition integration figure out, it was recognized that acquisition or union activities compel shelter non precisely when fro m strategic factors realised through synergies (see Chatterjee, 1992), precisely a resembling from the touch itself, which nonhingnesss to pass judgment interactive factors, as reflect in capital market expectations (see Jemison and Sitkin, 1986). Therefore, it is real strategic to understand the processes and factors resulting in incorporated coalition and acquisitions re look on de merely in front we critically evaluate the research paradigm of value concept. ontogenesis of AcquisitionsIn order to improve the understanding of the research hypothesis, firstly this theme attempts to coffin nailvas trends of acquisitions and unifications followed by comments on value creation during these decimal points. For illustration purposes, I forget focus my attention to the US economy considering the fact that corporate atomic number 18na is enriched with these activities and capital markets of get together States are much induceed comparative degree degree to mode ration of the world. Following section presents the analysis of corporate fusions and acquisitions programmes dated rearward to1897.The send- withdraw Wave, 1897-1904 consort to Gaughan (1999), this particular occlusive is dominated by naiant acquisitions resulting rand so forth in stock markets and ultimately creation of monopolies. Some of the todays freak pull togethers taked in first dither include General Electric, Ameri layab verboten Tobacco, Du Pont, Kodak and regular rock oil (see Gaughan, 1999). prime(prenominal) Merger Wave 1897 1904 socio-economic class event of Mergers1897 69 1898 303 1899 1208 1900 340 1901 423 1902 379 1903 142 1904 79 Table 3.1 First Merger Wave 1897 1904 writer Gaughan (1999), p.24 strategya skeletale 3.1 First Merger Wave 1897 -1904 selective information ancestor Gaughan (1999), p.24The Second Wave, 1916-1929In rail line to first seethe which is termed as merging for monopoly, the second beat is termed as merging for o ligopoly. Gaughan (1999) pointed out that the reason of this terminology is the predominance of just or horizontal integration of companies during the end of 1925 to end of the decade. more(prenominal) e very(prenominal)place, Jemison and Stikin (1986) argued that the abundant capital availability stimulated by palmy economic conditions resulted in salient corporate amalgamations and integration. Further according to Gaughan (1999), the antitrust law force during this era was stricter comparative to the first spinal fusion wave, which sortd more oligopolies and vertical integration and less monopolies in bloodline to earlier wave.The Third Wave, 1965-1969According to Gaughan (1986), the decade of sixties detect debatable of the uniting and acquisitions activities and termed as conglomerates. The companies such as ITT (International cry and telecommunicate Corporation, USA) and Textron acquired numerous uncor tie in businesses to diversify and to reduce cyclic risk s. Furthermore, during this period the conglomerates not only grew rapidly and profitably solely the management were perceived to be skilful as closely, which facilitated the diversity in acquisitions and operations of the companies (see Judelson, 1969). For instance, Geneen (1984) entrap down that during this wave ITT built itself into a exceedingly alter conglomerate by getting various businesses such as insurance, food and car rentals. Moreover, he rig that executives of the order used the advanced pecuniary besidesls exchangeable circumstantial budgeting and sloshed financial controls to make these acquisitions successful and well-functioning. Following figure presents the overview of the activities during the periodScholars corresponding Goold and Luchs (1993) argued that general management skills were one of the live factors in successful acquisitions and conjugations during this era, which also helped corporations to diversify in different businesses. Moreove r, engaging in misrelated business by numerous companies was establish on the assumptions that different businesses would not wait dis equal managerial skills (see Goold and Luchs, 1993).However, in late sixties companies get rolling confront performance occupations and the share price of these conglomerates such as Textron spend stringently 50% comparative to 9% drop in Dow Jones industrial clean (see Bonge and Coleman, 1972). Furthermore, in early seventies companies began to experience profitless maturation a standardized General Electric sales increase by 40% from 1965 to 1970 but its profit actually dropped (see Goold and Quinn, 1990).According to Gaughan (1999), the era has been ended when ITT reel off in three different companies. It is perceived that most of the amalgamations during the period failed and companies jettisoned their under-performing and unrelated business to face the competitive environment (see Sikora, 1995). In chalk upition, Sadlter et al (19 97) detect that the combine value of businesses separated from their parent firms signifi supporttly adjustment magnitude to more than $ ampere-second billion in 1996 comparative to 1993 figure of $17.5 billion.Acquisitions in the 1970sThe amalgamation and acquisition activities decreased signifi arousetly in 1970s, which can be seen in the chase figure.Figure 3.3 Merger Acquisitions in 1970 -1980 Source Gaughan (1999), p.36As a consequence of problem in fusion and acquisitions activities experient by conglomerates, the senior executives realised that only general management skills are not sufficient for a successful proceedings (see Chandler, 1962). Therefore, they focused their attentions toward the great term lodges objectives quite of direct of strategic business units (see Christensen, 1965).Andrews (1971) graduate(prenominal)lighted that this change introduced the thought of corporate strategy for firms and most CEOs of the organizations started accepting that s trategy is their unique and ab sea captain projection. However, corporate strategy poses round practical problem and did not help executives in deciding about allocation of resources among businesses especially when for each one investiture end has a different strategy (see Goold and Luchs, 1993). Moreover, Bower (1970) argued that investment conclusion should be part of overall business strategy instead than beat about the bush on project to project basis.In 1970s these revolutions in corporate pay lead to the development of portfolio training by Boston Consulting theme (1970). Soon, portfolio planning became famous in corporate sectors and according to the survey of Haspeslagh (1982) by 1979, 45 percent of the Fortune 500 companies were using portfolio planning in some form.However, with the passage of time problems related to portfolio planning emerged. As Goolds and Luchs (1993), argued that the corporate manager with long experience of particular sector of the atte ntion represent constitutionally punishing to manage their refreshedly acquired businesses in vibrant and unknown sectors. Consequently, this bear upon the performance of new acquisitions or mergers of the firms. In search of closure to this problem Hamermesh and White (1984) imbed that administration was a snappy factor in explain business performance of mergers or acquisitions but some organizations incorrectly addressed the approach.The Fourth Wave, 1981-1989The decade of 1980s seen another(prenominal) merger wave in business world. In this period, merger discerns were frequent and big and tot up value of mergers were slightly $.13 trillion in US (see Sikora, 1995).This was influenced by serve well sector and significant support from investors lenders and globalisation facilitated companies to finance the buyout deals (see Sikora, 1995). Moreover, the reasons of the one-quarter merger wave were excess cognitive content (see Jensen, 1993), agency problems (see J ensen, 1988), market misadventure (see Shleifer Vishny, 1997), and taxation and antitrust law changes (see Bhagat et al, 1990).It seems that during 80s, diversified firms do not have capacity to effect value thitherfore companies start re-thinking about social function of corporate management as well as appropriate strategies for diversified firms. As gamylighted by Goold and Luchs (1993) highlighted that in order to survive firms cut hazard be and scale down their staffs but these were not adequate to compel value. Furthermore, they argued that variegation strategies failed to create value for numerous businesses. Nevertheless, these failures compelled senior managers to transform their main(a) goals to creating shareholders determine instead of structure huge businesses (see Porter, 1987).Moreover, management of the companies started evaluating corporate performance desire stock market by using economic indicant instead of accounting measures and take whatever steps were essential to elevate the value of their firms stock (see Goold and Luchs, 1993). However, value ground planning based on financial hawkshaws of Return on Equity (ROE), internal rate of pass by and discounted cash lam provided different views to managers about competitive advantages and stock prices (see Rappaport, 1986). Further, Goold and Luchs (1993) pointed out that a high(prenominal) stock price could be a pay back for creating value.However, during the era of 80s firms that did not diversify into unrelated businesses and specialize into their sum of money industry were able to create value and turn out to be successful companies (see turncock and Waterman 1982). Mintzberg and Lampel (1999) also support this notion by lay out that focused corporations which know their customers, have deep knowledge and understand their missions were get out able to create value in contrast to companies that applied the variegation apprehension of value creation.In summary of th e merger and acquisitions activities in mid-sixties and 1980s, it can be assert that conglomeration and variegation were the dominant trends in sixties contrast to specialization and consolidations phenomena of 1980s. However, empirical license on value creation tends to suggest that significant merger and acquisitions of 60s run offd subsequently and did not lead to profitability. According to Shleifer and Vishny (1994) many of the conglomerates created in 1960s were destroyed in 1980s, which provides the evidence of failure in notion of merger acquisitions and value creation that was not expected in 1960s. The Current Wave, 1990-PresentAccording to Gaughan (1999), in contrast to 1960s decade of conglomerates and 1980s period of Leveraged Buyouts (LBO), the dominant deals of 90s were designed with a view to fit strategically among merging firms. Moreover, the forces behind the merger and acquisitions activities were different than earlier periods and corporate sector seen some of mega-deals during that period. For instance in 1996, the gain 100 deals of merger and acquisitions were worth more than $1 billion or approximately 53.5% of total proceeding (see Sikora, 1997).Merger Acquisitions in 1990sYear Number of Deals Value ($ Billions) 1980 1558 34.8 1981 2328 69.5 1982 2299 60.7 1983 2395 52.7 1984 3176 126.1 1985 3490 146.1 1986 2523 220.8 1987 2517 196.5 1988 3011 291.3 1989 3825 325.1 1990 4312 206.8 1991 3580 143.1 1992 3752 125.3 1993 4148 177.3 1994 4962 276.5 1995 6209 375.0 1996 6828 550.7 Table 3.2 Merger and Acquisitions in 1990s Data Source (www.mergerstat.com)The era of 90s was said to the decade of Consolidation which means cabal of operating and management resources between two companies as well as their stocks, pluss and liabilities (see Lipin, 1997).Furthermore, in 1990s, stable economic environment, relax antitrust laws, stock markets favourable conditions and low cost of capital were the catalyst of merger and acqu isition trends. However, pipe down many firms failed to create shareholder value and according to learning by Mercer focal point Consulting Inc. (1997) 48 percent of mergers failed to generate shareholder value in 90s comparative to 57 percent failure of 1980s (p.39, cited in Smith and Hershman, 1997). Nonetheless, the firms in 90s believed that larger pools of assets are essential either to survive or to grow but the question remains that how to discover ways to create value for portfolio of firms businesses? (see Goold and Luchas, 1993). To resolve this anomaly, three thinkable explanations have been identifiedFirstly, as immortalizen by Porter (1985) that diversification should be holded to companies which have synergy authorization and without synergy a diversified business is nothing more than rough-cut fund. He also suggested that synergies can be attained when the portfolio of businesses create values more than sum of its individual components. Besides, the notion of synergy should be based on economies of scale and cost saving strategies (see Porter, 1985).However, in put on it has been imbed by studies such as Chatterjee (1992) that gaining synergy is not an blowsy task and most acquisitions and merger gains arise from either disposals of assets or from restructuring rather than synergistic benefits. It seems that synergy was a primary rationale for merger and acquisitions in the era but remains anomaly from value creation future as discussed by Goold and Luchs (1993).Secondly, the corporate strategy of the firms should focus on exploiting core competencies. For instance, Prahalad and Hamel (1989) suggested that the corporate portfolio should be based on technological competencies instead of portfolio of businesses. Similarly, Itami (1989) argued that invisible assets like reputation, brand names or customers list are the most worth(predicate) source for sustaining competitive advantage and could be used to create value by exploiting com petitive opportunities. Furthermore, other competencies such as engineering or managerial expertise can also be used to enhance the performance of business portfolio (see Haspeslagh and Jemison, 1991).However, this approach also has some drawbacks for example, Goold and Luchs, pointed out that it can be difficult to assess the contribution of investment in building the competencies of a business especially when the investment is in new business area.Thirdly, the best way to create value via successful diversification is to build a portfolio of businesses, which fits with the managers logic and their management style (see Parahalad and Bettis, 1986). If conglomerates diversification is based on business with analogous strategic logic past its possible to add value to business by adopting a common approach across all the business units. For instance Goold and Luchs (1993) exposed that sharing the skills or activities across organization can help corporate management to seduce sy nergies. Moreover, Goold and Campbell (1987) found the evidence that top executives also find it difficult to deal with a wide range of styles and approaches.Review of Major Areas in MAThis section presents the literature reexamination of study areas focused by academics in merger and acquisition subject field. Consequently following five sub-sections have been realised to review the academic literature effect Success in Merger and Acquisitions spate in Merger and Acquisitions International Prospects of Merger and Acquisitions topper Practices in Merger and Acquisitions Valuation Issues in Merger and AcquisitionsThe measurement of success in merger and acquisition activities is mainly through quantitative research and is master to various studies such as Gosh (2001) Healy et al (1992), in the field of finance or economics and also other directly related fields. masses are normally unobserved in merger and acquisitions, however commodious studies like Bliss and Rosen (2001), addressed issues from ethical and organizational learning to more in depth personal perspective.Similarly, increase trend of international mint and globalization attracted the attention of many researchers, for instance Rossi and Volpin (2004).The valuation of the companies is a lot ascendant in the field of merger and acquisitions. However, it is a really critical part of acquisition process and could be very helpful not only in the pre-acquisition stage but also during the acquisition process as well as at post-acquisition stage (see Becher, 2001).Finally, the best practices research in the field of merger and acquisition is usually done in the form of deterrent example studies but the quality and intensity of these studies vary widely (see mark and Mirvis, 2001).Performance and Success in MAAs stated out front companies ofttimes engaged in the series of acquisitions and merger activities and early studies such as Barney (1988), tend to show that related acquisitions perform ed better than other acquisition transactions. However, relatedness itself does not create value for acquiring companies but synergy is the life-sustaining factor that helps companies to generate abnormal returns from acquisition programs. For example, Barney (1988) showed that synergistic cash flow stemming from relatedness, which is unique and private creates abnormal returns for shareholders of acquiring firm.However, later studies such as Hayward (2002), suggested that different level of relatedness results in various degree of success and fair identical companies tend to be more successful than the companies that are highly similar or dissimilar in business or coat to one another. He except reason out that if a firm experienced low-down losses in past acquisition in contrast to high losses or high gains then it has better chances of success in prospective acquisition. In addition, the measure of acquisition plays a vital usance in success of the transaction and should not be too close or far-away from central acquisition (see Hayward, 2002). Similarly, Brown and Eisenhard (1997) argued that companies benefit differently depending upon their experimenting and timing of the merger and acquisition activities.Moreover, when the acquiring company has some inimitable resources then it can create value by utilizing these resources in intentions company as suggested by Capron and Pistre (2000). However, they also added that if the source of synergies is recognized in physical object firm than market associate expected gains to target firm collectible to the competition among effectiveness bidders. Consequently, this competition raises the price of target firm and would create value for shareholders of the target firm but also lead to under performance of acquirer. Nevertheless, performance success through merger and acquisitions is still controversial among academics as pointed out by Cording et al (2002).To resolve the issue Chatterjee (1992) deli berate the additive average of abnormal returns (CAAR) during the period of 11 months before the gallop offer until 60 months afterwards the conjure offer. After studying the example of 577 tender offers between the periods of 1963 to 1986 he suggested that net gain arises for the economy from these transactions but it does not necessarily create gains for bothone involved in merger and acquisition. More specifically, CAAR after 60 months were observed to be negative for ruined bidders, range in for successful bidder and positivist for target company. Furthermore, Chatterjee (1992) found much higher corroboratory CAAR for restructured target companies in contrast to non-restructured targets.Certain studies view the merger and acquisition transactions from a different prospective. For example, Golbe and White (1993) proved in their study that macroeconomic environments influence the merger activities and the be of merger transactions increases in time of economic expansio n comparative to decrease in programme at the time of economic down turn.Similarly, Amburgey and Miner (1992) examine the personal effects of companies momentum on merger activities and suggested that managers follow the past patterns.The academics such as Capron (1999), also attempted to assess the performance of the merger and acquisition activities by conducting the survey of prime stakeholders in merger activities. He further concluded that the available financial info is too gross to result the insularism between the types of pure value-creating mechanism. Moreover, he also argued that more often the objective of the companies is to retain the top management team of the targets firm, whether its a conglomerate or related merger.International Prospects of MAThe emergence of globalisation and increasing trends in international trade fasten the number of local as well as cross-border acquisitions and merger activities. For instance, the cross-border acquisition activities in U nited States increased to 19% in 1999 from 6% in 1985 (see band et al, 2001).According to the study of exercise set et al (2001), the evidence suggests that there are three motives for cross-border acquisitions such as synergy seeking, managerilism and managerial hubris. Moreover, the research tends to show that there is a positive relationship between the level of value creation and reverse internalization, asset sharing, financial sharing and market seeking ( as discussed by Seth et al, 2001).In addition, there seems to be association between value creation and organisation system of bidders country. For instance, Seth et al (2001) argued that play companies from group-oriented governance system like Japan and Germany appear to be engaged in acquisitions and merger activities with higher level of value creation in contrast to bidding firms from market oriented governance system such as United Kingdom.Further enhancement of research in the area of cross-border merger and acquisi tion suggests that experience in merger and acquisition activities can be utilized to create value in another country. For example, Gugler et al (2003) compared the data of 15 years and proved that post merger patterns are similar across different countries. Moreover, their evidence also signifies that there are no major differences between domestic and cross-border mergers as well as manufacturing and servicing sectors around the world.With the passage of time and in the era of globalization the merger and acquisitions activities are increasing especially in emerging economies. The multinational companies often use the tools of acquisition and mergers to penetrate in new markets and economies particularly in emerging countries such as Central and Eastern Europe (see Milman, 1999).However, in many countries MNC mergers and acquisitions are seen as threats by government agencies, privatized companies and state enterprises. Therefore, in order to develop a successful alliance the a cquisition or merger program should be designed in such as way that creates value for companies as well as the host-country governments (see Rondinelli and Black, 2000).Lastly, yet the number of merger and acquisitions across border appears to be increasing but it seems difficult to immix and manage the successful processes. Hence, Inkpen et al (2000) suggested that the companies should critically evaluate the areas of conclusiveness making, discourse, networking and socialisation, communication and the structure of authority and responsibility before involving in the process of MA. nation in MAOnly looking to financial aspects powerfulness limit the understanding about the question why MA activities are so widely used by companies as a tool to grow. Hence, another area focused by academics, such as Karitzki and margin (2003), is related to merger and acquisitions and mickle.Generally, one of the motives for merger activities is to follow the cost-cutting strategies including synergy and targets customers. Often, the employees are fixed off in the process of merger and acquisitions and consequently this creates new but conflicting networks of relationships in new companies as suggested by Vermeulen and Barkema (2001). Thus, it affects the success and results in under-performance of merger and acquisition programmes. Therefore, considering the affects of MA on employee or managers of the potential difference target firms are of similar importance as financial issues.Similarly, the research in the area of executive compensation pointed out that prior to acquisition or merger, management of acquiring company receive significant higher packages comparative to the executives of target firms (see Lynch and Perry, 2002). Hence, these issues can lead to turnover and team spirit issues that ultimately affect the success of anticipated integration from MA. Furthermore, in extreme circumstances, issues like these emerging from dissimilarities create hurdles to achieve the objective of the original merger and acquisitions. Thus, reconciling the differences is one of the major issues faced by the combined company to create value (as discussed in Lynch and Perry, 2002).Moreover, successful merger or acquisition depends upon the people in both target and acquiring firms. The military strength and opinion of the employees regarding acquisition or merger can change over the time. Schweiger and DeNisi (1991) conducted the survey of employees and compared the carriages in pre-acquisition and post-acquisition period. Their results show that attitudes of the employees three months after the contract of merger changed significantly and turn towards continual negative consequences (see Schweiger and DeNisi, 1991).Likewise, Covin et al (1996) study the attitude of 2845 employees from a large manufacturing concern in post merger period. The results show significant differences between the target firm and acquiring companys employees in rejoicing w ith merger. The employees of acquired company faced high level of dissatisfaction and ultimately mat more stress out-of-pocket to changes introduced after merger. In addition, this stress is modify due to the direct competition between target firm and acquiring company. Furthermore, Covin et al (1996) pointed out that factors such as loss of power and status, changes in requital or benefits and lack of managerial direction result in high level of stress and dissatisfaction from merger activities.Hence, it has been suggested that in addition to financial aspects these types of issues should not be overlooked in order to create value and to develop a successful merger and acquisition programme (see Karitzki and Brink, 2003).Best Practices in MAIt is often suggested that acquisitions are predominantly unsuccessful and numerous studies like Aiello and Watkins (2000), confirmed this fact. However, generally the conditions and environment is relevant before judicial decision the resu lts. Furthermore, there is lack of research in answering the question what would transcend if both the companies continued in their own separate way. Therefore, estimating the successfulness of merger or acquisition is a tricky anomaly (as discussed in Chaudhuri and Tabrizi, 1999).Moreover, the unsuccessful MA activities are more highlighted in contrast to successful programmes. Ed Libby, the hot seat and CEO of AllState stated that when MAs fails they draw more notice patronage the fact that lot of other projects fails in business but no one can see them because they remain within internal walls of the companies (cited in Cary, 2000).As stated earlier, there is no one strategy that fits all kinds of merger and acquisition activities, however systematic approaches such as suggested by Jan Leschly, can help companies to develop a successful plan. Jan Leschly, retired CEO of SmithKline Beecham suggested that they put their people on the boards of different companies by investing sma ll amounts. erst the companies get going then they decide whether to buy it completely or not (cited in Cary, 2000).Likewise, understanding the various components of merger process is very vital to develop a successful merger or acquisition deal. However, it is very hard to enumerate the components especially when these are integrated with each other. According to Marks and Mirvis (2001), the successfulness of merger and acquisition is highly depended on following factorsAcquisition Plan Implementation of this plan Post-acquisition cooperation between firms after acquisitionMoreover, they collected a number of factors that were mentioned in previous research such as strategic objective, clear selection, search and selection process etc. They also argued that pre-acquisition planning is very important for successful merger and acquisition plan and more prepared the people will more synergies in a combination will result (see Marks and Mirvis, 2001).Similarly, Aiello and Watkins (20 00) suggested that every MA deal pass through following five stages viewing potential deal Reaching initial agreement ConduMerger Acquisitions and Value CreationMerger Acquisitions and Value CreationLITERATURE REVIEWMany firms used corporate mergers or acquisitions as business strategy to accomplish various objectives. For instance, businesses used acquisitions to enter into new markets and regions, allocate capital or gain technical expertise and knowledge. Therefore, organizations often utilize strategic mergers and acquisitions in order to grow or survive. However most of the poorly managed acquisitions or merger resulted in disappointing performance and up to 50 percent are considered unsuccessful (see Louis, 1982). Furthermore, according to Smith and Hershman (1997), it was held by Mercer Management Consulting that in 1980s, 57 percent of acquisitions were failed and the successful corporate acquisitions in 1990s were hardly 50 percent (p.39, cited in Smith and Hershman, 199 7).To date, merger or acquisition is one of the most widely used instruments to enhance the growth of organizations. Systematic and sophisticated corporate research helps companies to understand the pre and post-acquisitions performance and achieving other business objectives (as discussed in Singh Zollo, 2000). However, according to Sirower (1997), empirical academic literature does not provide any clear understanding, which facilitates the managers to maximise the success of acquisitions or merger programs. Therefore, understanding the source of value creation is critical to determine the causes of failure or success in corporate merger or acquisitions.The literature review presented in this section critically evaluates and analyze the earlier studies in order to solve the paradigm of Merger Acquisitions and Value Creation.Corporate Acquisitions and Their Research ParadigmsDatta et al. (1992) suggested two distinct frameworks for acquisitions programmes to identify sources of sh areholders wealth i.e. strategic management and financial economics literature and both approaches follow different research directions.The strategic management approach focused on factors that have been controlled by management. For instance, Datta et al (1992) suggested that in order to assess the post-acquisition performance, this approach attempts to differentiate between various diversification strategies and types of acquisitions or types of payment in acquisitions (i.e. stock vs. cash). In contrast, financial economic research attempted to prove the unique hypothesis of market for corporate control. This approach views the acquisition activities as a contest among different management teams in a competition to control corporate firms as argued by Datta et al (1992). Therefore, this view suggests that the value creation through merger or acquisitions is decided by capital market and its characteristics including its competitiveness such as regulatory modification affecting a p articular market (see Datta et al, 1992).However, these two methodologies are unable to explain the factors resulting in unsuccessful corporate acquisitions. Thus, many academics such as Chatterjee (1992), attempted to identify critical variables of ineffective performance in acquisitions or merger activities by studying the relationship between post-acquisition performance and integration. While the initial notion by Kitching (1967) that the key factor for a successful corporate acquisition is the post-acquisition integration process, it was recognised that acquisition or merger activities create value not only from strategic factors realised through synergies (see Chatterjee, 1992), but also from the process itself, which leads to anticipated synergistic factors, as reflect in capital market expectations (see Jemison and Sitkin, 1986). Therefore, it is very important to understand the processes and factors resulting in corporate merger and acquisitions value creation before we cri tically evaluate the research paradigm of value creation. Evolution of AcquisitionsIn order to improve the understanding of the research hypothesis, firstly this paper attempts to review trends of acquisitions and mergers followed by comments on value creation during these periods. For illustration purposes, I will focus my attention to the US economy considering the fact that corporate sector is enriched with these activities and capital markets of United States are much developed comparative to rest of the world. Following section presents the analysis of corporate mergers and acquisitions programmes dated back to1897.The First Wave, 1897-1904According to Gaughan (1999), this particular period is dominated by horizontal acquisitions resulting surge in stock markets and ultimately creation of monopolies. Some of the todays giant conglomerates created in first wave include General Electric, American Tobacco, Du Pont, Kodak and Standard Oil (see Gaughan, 1999).First Merger Wave 1897 1904Year Number of Mergers1897 69 1898 303 1899 1208 1900 340 1901 423 1902 379 1903 142 1904 79 Table 3.1 First Merger Wave 1897 1904 Source Gaughan (1999), p.24Figure 3.1 First Merger Wave 1897 -1904 Data Source Gaughan (1999), p.24The Second Wave, 1916-1929In contrast to first wave which is termed as merging for monopoly, the second wave is termed as merging for oligopoly. Gaughan (1999) pointed out that the reason of this terminology is the predominance of vertical or horizontal integration of companies during the period of 1925 to end of the decade. Moreover, Jemison and Stikin (1986) argued that the abundant capital availability stimulated by favourable economic conditions resulted in prominent corporate mergers and integration. Further according to Gaughan (1999), the antitrust law force during this era was stricter comparative to the first merger wave, which created more oligopolies and vertical integration and fewer monopolies in contrast to earlier wave.The Third Wave, 1965-1969According to Gaughan (1986), the decade of 1960s observed controversial of the merger and acquisitions activities and termed as conglomerates. The companies such as ITT (International Telephone and Telegraph Corporation, USA) and Textron acquired numerous unrelated businesses to diversify and to reduce cyclic risks. Furthermore, during this period the conglomerates not only grew rapidly and profitably but the management were perceived to be skilful as well, which facilitated the diversity in acquisitions and operations of the companies (see Judelson, 1969). For instance, Geneen (1984) documented that during this wave ITT built itself into a highly diversified conglomerate by acquiring various businesses such as insurance, food and car rentals. Moreover, he found that executives of the company used the advanced financial tools like detailed budgeting and tight financial controls to make these acquisitions successful and well-functioning. Following figure presents the overview of the activities during the periodScholars like Goold and Luchs (1993) argued that general management skills were one of the vital factors in successful acquisitions and mergers during this era, which also helped corporations to diversify in different businesses. Moreover, engaging in unrelated business by many companies was based on the assumptions that different businesses would not require dissimilar managerial skills (see Goold and Luchs, 1993).However, in late 1960s companies start facing performance problems and the share price of these conglomerates such as Textron fell almost 50% comparative to 9% drop in Dow Jones Industrial average (see Bonge and Coleman, 1972). Furthermore, in early 1970s companies began to experience profitless growth like General Electric sales increased by 40% from 1965 to 1970 but its profit actually dropped (see Goold and Quinn, 1990).According to Gaughan (1999), the era has been ended when ITT spin off in three different companies. It is p erceived that most of the mergers during the period failed and companies jettisoned their under-performing and unrelated business to face the competitive environment (see Sikora, 1995). In addition, Sadlter et al (1997) observed that the combined value of businesses separated from their parent firms significantly increased to more than $100 billion in 1996 comparative to 1993 figure of $17.5 billion.Acquisitions in the 1970sThe merger and acquisition activities decreased significantly in 1970s, which can be seen in the following figure.Figure 3.3 Merger Acquisitions in 1970 -1980 Source Gaughan (1999), p.36As a consequence of problem in merger and acquisitions activities experienced by conglomerates, the senior executives realised that only general management skills are not sufficient for a successful transactions (see Chandler, 1962). Therefore, they focused their attentions toward the long term companys objectives instead of operating of strategic business units (see Christensen, 1965).Andrews (1971) highlighted that this change introduced the concept of corporate strategy for firms and most CEOs of the organizations started accepting that strategy is their unique and primary task. However, corporate strategy poses some practical problem and did not help executives in deciding about allocation of resources among businesses especially when each investment proposal has a different strategy (see Goold and Luchs, 1993). Moreover, Bower (1970) argued that investment decision should be part of overall business strategy rather than prevaricate on project to project basis.In 1970s these revolutions in corporate finance lead to the development of portfolio planning by Boston Consulting Group (1970). Soon, portfolio planning became famous in corporate sectors and according to the survey of Haspeslagh (1982) by 1979, 45 percent of the Fortune 500 companies were using portfolio planning in some form.However, with the passage of time problems related to portfolio planni ng emerged. As Goolds and Luchs (1993), argued that the corporate manager with long experience of particular sector of the industry found passing difficult to manage their newly acquired businesses in vibrant and unfamiliar sectors. Consequently, this affected the performance of new acquisitions or mergers of the firms. In search of solution to this problem Hamermesh and White (1984) found that administration was a vital factor in explain business performance of mergers or acquisitions but many organizations incorrectly addressed the approach.The Fourth Wave, 1981-1989The decade of 1980s seen another merger wave in business world. In this period, merger deals were frequent and larger and total value of mergers were approximately $.13 trillion in US (see Sikora, 1995).This was influenced by service sector and significant support from investors lenders and globalization facilitated companies to finance the buyout deals (see Sikora, 1995). Moreover, the reasons of the fourth merger wa ve were excess capacity (see Jensen, 1993), agency problems (see Jensen, 1988), market failure (see Shleifer Vishny, 1997), and tax and antitrust law changes (see Bhagat et al, 1990).It seems that during 80s, diversified firms do not have capacity to create values therefore companies start re-thinking about role of corporate management as well as appropriate strategies for diversified firms. As highlighted by Goold and Luchs (1993) highlighted that in order to survive firms cut back costs and scale down their staffs but these were not adequate to create value. Furthermore, they argued that diversification strategies failed to create value for many businesses. Nevertheless, these failures compelled senior managers to transform their primary goals to creating shareholders values instead of building huge businesses (see Porter, 1987).Moreover, management of the companies started evaluating corporate performance like stock market by using economic indicator instead of accounting measur es and take whatever steps were essential to enhance the value of their firms stock (see Goold and Luchs, 1993). However, value based planning based on financial tools of Return on Equity (ROE), internal rate of return and discounted cash flow provided different views to managers about competitive advantages and stock prices (see Rappaport, 1986). Further, Goold and Luchs (1993) pointed out that a higher stock price could be a reward for creating value.However, during the era of 80s firms that did not diversify into unrelated businesses and specialize into their core industry were able to create value and turn out to be successful companies (see Peter and Waterman 1982). Mintzberg and Lampel (1999) also support this notion by arguing that focused corporations which know their customers, have deep knowledge and understand their missions were better able to create value in contrast to companies that applied the diversification concept of value creation.In summary of the merger and acq uisitions activities in 1960s and 1980s, it can be assert that conglomeration and diversification were the dominant trends in 1960s contrast to specialization and consolidations phenomena of 1980s. However, empirical evidence on value creation tends to suggest that significant merger and acquisitions of 60s reversed subsequently and did not lead to profitability. According to Shleifer and Vishny (1994) many of the conglomerates created in 1960s were destroyed in 1980s, which provides the evidence of failure in notion of merger acquisitions and value creation that was not expected in 1960s. The Current Wave, 1990-PresentAccording to Gaughan (1999), in contrast to 1960s decade of conglomerates and 1980s period of Leveraged Buyouts (LBO), the dominant deals of 90s were designed with a view to fit strategically among merging firms. Moreover, the forces behind the merger and acquisitions activities were different than earlier periods and corporate sector seen some of mega-deals during t hat period. For instance in 1996, the top 100 deals of merger and acquisitions were worth more than $1 billion or approximately 53.5% of total transactions (see Sikora, 1997).Merger Acquisitions in 1990sYear Number of Deals Value ($ Billions) 1980 1558 34.8 1981 2328 69.5 1982 2299 60.7 1983 2395 52.7 1984 3176 126.1 1985 3490 146.1 1986 2523 220.8 1987 2517 196.5 1988 3011 291.3 1989 3825 325.1 1990 4312 206.8 1991 3580 143.1 1992 3752 125.3 1993 4148 177.3 1994 4962 276.5 1995 6209 375.0 1996 6828 550.7 Table 3.2 Merger and Acquisitions in 1990s Data Source (www.mergerstat.com)The era of 90s was said to the decade of Consolidation which means combination of operating and management resources between two companies as well as their stocks, assets and liabilities (see Lipin, 1997).Furthermore, in 1990s, stable economic environment, relax antitrust laws, stock markets favourable conditions and low cost of capital were the catalyst of merger and acquisition trends. H owever, still many firms failed to create shareholder value and according to study by Mercer Management Consulting Inc. (1997) 48 percent of mergers failed to generate shareholder value in 90s comparative to 57 percent failure of 1980s (p.39, cited in Smith and Hershman, 1997). Nonetheless, the firms in 90s believed that larger pools of assets are essential either to survive or to grow but the question remains that how to discover ways to create value for portfolio of firms businesses? (see Goold and Luchas, 1993). To resolve this anomaly, three possible explanations have been identifiedFirstly, as shown by Porter (1985) that diversification should be limited to companies which have synergy potential and without synergy a diversified business is nothing more than mutual fund. He also suggested that synergies can be attained when the portfolio of businesses create values more than sum of its individual components. Besides, the notion of synergy should be based on economies of scale a nd cost saving strategies (see Porter, 1985).However, in practice it has been found by studies such as Chatterjee (1992) that gaining synergy is not an easy task and most acquisitions and merger gains arise from either disposals of assets or from restructuring rather than synergistic benefits. It seems that synergy was a primary rationale for merger and acquisitions in the era but remains anomaly from value creation prospective as discussed by Goold and Luchs (1993).Secondly, the corporate strategy of the firms should focus on exploiting core competencies. For instance, Prahalad and Hamel (1989) suggested that the corporate portfolio should be based on technological competencies instead of portfolio of businesses. Similarly, Itami (1989) argued that invisible assets like reputation, brand names or customers list are the most valuable source for sustaining competitive advantage and could be used to create value by exploiting competitive opportunities. Furthermore, other competencies such as technology or managerial expertise can also be used to enhance the performance of business portfolio (see Haspeslagh and Jemison, 1991).However, this approach also has some drawbacks for example, Goold and Luchs, pointed out that it can be difficult to assess the contribution of investment in building the competencies of a business especially when the investment is in new business area.Thirdly, the best way to create value via successful diversification is to build a portfolio of businesses, which fits with the managers logic and their management style (see Parahalad and Bettis, 1986). If conglomerates diversification is based on business with similar strategic logic then its possible to add value to business by adopting a common approach across all the business units. For instance Goold and Luchs (1993) exposed that sharing the skills or activities across organization can help corporate management to realize synergies. Moreover, Goold and Campbell (1987) found the evidence that top executives also find it difficult to deal with a wide range of styles and approaches.Review of Major Areas in MAThis section presents the literature review of major areas focused by academics in merger and acquisition field. Consequently following five sub-sections have been established to review the academic literaturePerformance Success in Merger and Acquisitions People in Merger and Acquisitions International Prospects of Merger and Acquisitions Best Practices in Merger and Acquisitions Valuation Issues in Merger and AcquisitionsThe measurement of success in merger and acquisition activities is mainly through quantitative research and is subject to various studies such as Gosh (2001) Healy et al (1992), in the field of finance or economics and also other directly related fields.People are normally unobserved in merger and acquisitions, however extensive studies like Bliss and Rosen (2001), addressed issues from ethical and organizational learning to more in depth person al perspective.Similarly, increasing trend of international trade and globalization attracted the attention of many researchers, for instance Rossi and Volpin (2004).The valuation of the companies is often overlooking in the field of merger and acquisitions. However, it is a very critical part of acquisition process and could be very helpful not only in the pre-acquisition stage but also during the acquisition process as well as at post-acquisition stage (see Becher, 2001).Finally, the best practices research in the field of merger and acquisition is usually done in the form of case studies but the quality and intensity of these studies vary widely (see Marks and Mirvis, 2001).Performance and Success in MAAs stated before companies often engaged in the series of acquisitions and merger activities and early studies such as Barney (1988), tend to show that related acquisitions performed better than other acquisition transactions. However, relatedness itself does not create value for a cquiring companies but synergy is the vital factor that helps companies to generate abnormal returns from acquisition programs. For example, Barney (1988) showed that synergistic cash flow stemming from relatedness, which is unique and private creates abnormal returns for shareholders of acquiring firm.However, later studies such as Hayward (2002), suggested that different level of relatedness results in various degree of success and moderately similar companies tend to be more successful than the companies that are highly similar or dissimilar in business or size to one another. He further concluded that if a firm experienced small losses in past acquisition in contrast to high losses or high gains then it has better chances of success in prospective acquisition. In addition, the timing of acquisition plays a vital role in success of the transaction and should not be too close or far-away from central acquisition (see Hayward, 2002). Similarly, Brown and Eisenhard (1997) argued tha t companies benefit differently depending upon their experimenting and timing of the merger and acquisition activities.Moreover, when the acquiring company has some inimitable resources then it can create value by utilizing these resources in targets company as suggested by Capron and Pistre (2000). However, they also added that if the source of synergies is recognized in target firm than market associate expected gains to target firm due to the competition among potential bidders. Consequently, this competition raises the price of target firm and would create value for shareholders of the target firm but also lead to under performance of acquirer. Nevertheless, performance success through merger and acquisitions is still controversial among academics as pointed out by Cording et al (2002).To resolve the issue Chatterjee (1992) measured the cumulative average of abnormal returns (CAAR) during the period of 11 months before the tender offer until 60 months after the tender offer. Aft er studying the sample of 577 tender offers between the periods of 1963 to 1986 he suggested that net gain arises for the economy from these transactions but it does not necessarily create gains for everyone involved in merger and acquisition. More specifically, CAAR after 60 months were observed to be negative for unsuccessful bidders, zero for successful bidder and positive for target company. Furthermore, Chatterjee (1992) found much higher positive CAAR for restructured target companies in contrast to non-restructured targets.Certain studies view the merger and acquisition transactions from a different prospective. For example, Golbe and White (1993) proved in their study that macroeconomic environments influence the merger activities and the number of merger transactions increases in time of economic expansion comparative to decrease in programme at the time of economic down turn.Similarly, Amburgey and Miner (1992) studied the effects of companies momentum on merger activities and suggested that managers follow the past patterns.The academics such as Capron (1999), also attempted to assess the performance of the merger and acquisition activities by conducting the survey of prime stakeholders in merger activities. He further concluded that the available financial data is too gross to allow the separation between the types of pure value-creating mechanism. Moreover, he also argued that more often the objective of the companies is to retain the top management team of the targets firm, whether its a conglomerate or related merger.International Prospects of MAThe emergence of globalisation and increasing trends in international trade fasten the number of local as well as cross-border acquisitions and merger activities. For instance, the cross-border acquisition activities in United States increased to 19% in 1999 from 6% in 1985 (see Seth et al, 2001).According to the study of Seth et al (2001), the evidence suggests that there are three motives for cross-bor der acquisitions such as synergy seeking, managerilism and managerial hubris. Moreover, the research tends to show that there is a positive relationship between the level of value creation and reverse internalization, asset sharing, financial sharing and market seeking ( as discussed by Seth et al, 2001).In addition, there seems to be association between value creation and governance system of bidders country. For instance, Seth et al (2001) argued that bidding companies from group-oriented governance system like Japan and Germany appear to be engaged in acquisitions and merger activities with higher level of value creation in contrast to bidding firms from market oriented governance system such as United Kingdom.Further enhancement of research in the area of cross-border merger and acquisition suggests that experience in merger and acquisition activities can be utilized to create value in another country. For example, Gugler et al (2003) compared the data of 15 years and proved tha t post merger patterns are similar across different countries. Moreover, their evidence also signifies that there are no major differences between domestic and cross-border mergers as well as manufacturing and service sectors around the world.With the passage of time and in the era of globalization the merger and acquisitions activities are increasing especially in emerging economies. The multinational companies often use the tools of acquisition and mergers to penetrate in new markets and economies particularly in emerging countries such as Central and Eastern Europe (see Milman, 1999).However, in many countries MNC mergers and acquisitions are seen as threats by government agencies, privatized companies and state enterprises. Therefore, in order to develop a successful alliance the acquisition or merger program should be designed in such as way that creates value for companies as well as the host-country governments (see Rondinelli and Black, 2000).Lastly, yet the number of merger and acquisitions across border appears to be increasing but it seems difficult to integrate and manage the successful processes. Hence, Inkpen et al (2000) suggested that the companies should critically evaluate the areas of decision making, communication, networking and socialisation, communication and the structure of authority and responsibility before involving in the process of MA. People in MAOnly looking to financial aspects might limit the understanding about the question why MA activities are so widely used by companies as a tool to grow. Hence, another area focused by academics, such as Karitzki and Brink (2003), is related to merger and acquisitions and people.Generally, one of the motives for merger activities is to follow the cost-cutting strategies including synergy and targets customers. Often, the employees are laid off in the process of merger and acquisitions and consequently this creates new but conflicting networks of relationships in new companies as suggested by Vermeulen and Barkema (2001). Thus, it affects the success and results in under-performance of merger and acquisition programmes. Therefore, considering the affects of MA on employee or managers of the potential target firms are of similar importance as financial issues.Similarly, the research in the area of executive compensation pointed out that prior to acquisition or merger, management of acquiring company receive significant higher packages comparative to the executives of target firms (see Lynch and Perry, 2002). Hence, these issues can lead to turnover and morale issues that ultimately affect the success of anticipated integration from MA. Furthermore, in extreme circumstances, issues like these emerging from dissimilarities create hurdles to achieve the objective of the original merger and acquisitions. Thus, reconciling the differences is one of the major issues faced by the combined company to create value (as discussed in Lynch and Perry, 2002).Moreover, successful mer ger or acquisition depends upon the people in both target and acquiring firms. The attitude and opinion of the employees regarding acquisition or merger can change over the time. Schweiger and DeNisi (1991) conducted the survey of employees and compared the attitudes in pre-acquisition and post-acquisition period. Their results show that attitudes of the employees three months after the announcement of merger changed significantly and turn towards continual negative consequences (see Schweiger and DeNisi, 1991).Likewise, Covin et al (1996) studied the attitude of 2845 employees from a large manufacturing concern in post merger period. The results show significant differences between the target firm and acquiring companys employees in satisfaction with merger. The employees of acquired company faced high level of dissatisfaction and ultimately felt more stress due to changes introduced after merger. In addition, this stress is aggravated due to the direct competition between target f irm and acquiring company. Furthermore, Covin et al (1996) pointed out that factors such as loss of power and status, changes in salary or benefits and lack of managerial direction result in high level of stress and dissatisfaction from merger activities.Hence, it has been suggested that in addition to financial aspects these types of issues should not be overlooked in order to create value and to develop a successful merger and acquisition programme (see Karitzki and Brink, 2003).Best Practices in MAIt is often suggested that acquisitions are predominantly unsuccessful and numerous studies like Aiello and Watkins (2000), confirmed this fact. However, generally the conditions and environment is relevant before judging the results. Furthermore, there is lack of research in answering the question what would happen if both the companies continued in their own separate way. Therefore, estimating the successfulness of merger or acquisition is a tricky anomaly (as discussed in Chaudhuri a nd Tabrizi, 1999).Moreover, the unsuccessful MA activities are more highlighted in contrast to successful programmes. Ed Libby, the chairman and CEO of AllState stated that when MAs fails they draw more notice despite the fact that lot of other projects fails in business but no one can see them because they remain within internal walls of the companies (cited in Cary, 2000).As stated earlier, there is no one strategy that fits all kinds of merger and acquisition activities, however systematic approaches such as suggested by Jan Leschly, can help companies to develop a successful plan. Jan Leschly, retired CEO of SmithKline Beecham suggested that they put their people on the boards of different companies by investing small amounts. Once the companies get going then they decide whether to buy it completely or not (cited in Cary, 2000).Likewise, understanding the various components of merger process is very vital to develop a successful merger or acquisition deal. However, it is very h ard to enumerate the components especially when these are integrated with each other. According to Marks and Mirvis (2001), the successfulness of merger and acquisition is highly depended on following factorsAcquisition Plan Implementation of this plan Post-acquisition cooperation between firms after acquisitionMoreover, they collected a number of factors that were mentioned in previous research such as strategic objective, clear selection, search and selection process etc. They also argued that pre-acquisition planning is very important for successful merger and acquisition plan and more prepared the people will more synergies in a combination will result (see Marks and Mirvis, 2001).Similarly, Aiello and Watkins (2000) suggested that every MA deal pass through following five stages Screening potential deal Reaching initial agreement Condu