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“Mergers and acquisitions (abbreviated M&A) is an aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or new location, without creating a subsidiary”

Definition from Wikipedia

Key terms:

• Corporate Strategy à Logic of M&A, explanation of the why, if it makes sense

• Corporate Finance à Set the price (how much), how we pay (stock/cash) and how we get financed (internal funds, debt, equity)

Main or rational reasons of M&A activities:

Growth of the business: in many business organic growth opportunities are reduced, thus growth is only possible through acquisitions.

Enter in a new business/sector without start building the new business from scratch (greenfield)

Synergies from merging two companies, assuming that the whole is greater than the sum of two parts (2+2=5).

• Cost savings / Revenue enhancements / Process improvements / Financial engineering / Tax benefits

NOTE: Synergies are can be easy evaluated BUT difficult to realize!!!

BUT growth and synergies (realized) cannot explain the important volume of mergers activities in the markets….we need more explanations according to:

(i) Degree of rationality/irrationality of managers:

(i) Hubris explanation: merger activity is driven by pride “my deal will be different even if almost all deals fail”.

(ii) Market mania: “I don’t want to be left out from the merger wave of industry consolidation of the moment” .

(iii) Agency cost: managers (agent) start to an “empire building” to the detriment of the shareholder (principal).

(ii) The degree of efficiency of financial markets

• Firm’s stocks overvaluation: because of market inefficiency stock markets may overvalue some stocks and undervalue other stock. This trigger share-to-share deals when overvalued companies buy undervalued companies.

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