Table 3.1 First Merger Wave 1897 – 1904 10
Table 3.2 Merger and Acquisitions in 1990s 18
Figure 3.1 First Merger Wave 1897 -1904 11
Figure 3.2 Third Merger Wave 1963 – 1970 12
Figure 3.3 Merger & Acquisitions in 1970 -1980 14
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Many 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, 1997).
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 â€œMerger & Acquisitions and Value Creationâ€?.
Datta et al. (1992) suggested two distinct frameworks for acquisitions programmes to identify sources of shareholder’s 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 particular market (see Datta et al, 1992).
However, these two methodologies are unable to explain the factors resulting in unsuccessful corporate acquisitions.
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