International Business Investment Opportunities: International Merger and Acquisition Activity

Over the past 30 years mergers and acquisition (M&As) as a complex phenomenon has attracted substantial interest from a variety of management disciplines. Merger and acquisition play a vital role in corporate finance and as a source of external growth when organic growth in not possible.  In practice, acquiring another company is a far more complex process. For example, valuing a target company and estimating the potential benefits of acquiring it are more difficult propositions than valuing a simple investment project.  Moreover, the M &A process is often complicated by bids being resisted by the target company and hence acquisition may become a long and unpleasant contest (Weston and Head, 2004).  

Economic Justifications

The economic justification for M &A is that shareholders wealth will be increased by the transaction, as the two companies are worth more combined than as separate companies. This can be shown bellow:

PV           > (PV + PV)

     x+y            x        y         

The PV represents present value and X and Y are the two companies involved. Economic gain may be generated for a number of reasons. For example, synergy, economies of scale, entry of a new markets, market power and market share.

Financial Justifications

Acquisition can also be justified on the grounds of the financial benefits they bring to the shareholders of the companies involved. For example, financial synergy, target undervaluation, tax considerations and increasing earning per share.

Additionally, according to the United Nations New York and Geneva (2005) merger and acquisition can be taken a form of investment into the R&D facility.  It might be argued that such transactions involve a simple change of ownership, similar to portfolio investment, with lesser developmental value.  Some M &A could have an adverse effect.  For example, the acquisition of firms in the automotive and telecommunications industries of Brazil by Transnational corporations (TNCs) in 1990, resulted in a scaling down of R&D activities in the acquired firms (UNCTAD 1999).

Example of Recent Acquisitions

Mergers and acquisitions continue to be a highly popular form of corporate development. For example, in 2004, 30,000 acquisitions were completed globally, equivalent to one transaction every 18 minutes (Cartwright and Schoenberg, 2006).

The total value of these acquisitions was $1,900 billion, exceeding the GDP of several large countries. However, in parallel to these popularity, the failure rates of mergers and acquisitions is high(Cartwright and Schoenberg, 2006).

Recently, according to Guardian (2011) Swiss medical devices maker (Synthes) which makes nails, screws and plates to fix broken bones, as well as artificial spine discs is to be bought by Johnson & Johnson (J&J). The deal worth $21.3bn (£14bn) and it is the largest buy that will boost its orthopedics franchise and reshaping the medical technology industry. However, Target firm shareholders generally enjoy positive short-term returns (Agrawal and Jaffe, 2000), for instance, the diversified healthcare group will pay 159 Swiss francs (£110.38) per share for Synthes and the premium is 8.5% over Synthes's closing share price (Guardian, 2011).  On the other hand, investors in bidding firms frequently experience share price underperformance in the months following acquisition, with negligible overall wealth gains for portfolio holders (Agrawal and Jaffe, 2000).

The deal, which is expected to close in the first half of 2012, has the backing of both boards and will give J&J a leading position in equipment to treat trauma.  Synthes’s sales in 2010 was $3.7bn in 2010. However, Can J&J achieve any real and lasting success? Shareholders record  reveals that acquisitions continue to produce negative average returns similar to those seen historically (Agrawal and Jaffe, 2000; Gregory, 1997). Moreover, target firm executives experience considerable accumulated stress and, on average, almost 70% leave in the five years following completion (Krug and Aguilera, 2005).

Resources

United Nations New York and Geneva (2005) Globalisation of R&D and Developing Countries: Proceedings of the Expert Meeting

UNCTAD (1999). World Investment Report 1999: Foreign Direct Investment and the Challenge for Development. New York and Geneva: United Nations. United Nations publication, Sales No. E.99.II.D.3.

Watson, D. and Head, A. (2004) Corporated Finance: Principles and Practice. 3^rd edition. London: Pearson Education

Johnson & Johnson to buy Synthes for $21.3bn Deal to buy Swiss medical devices maker is J&J's biggest ever- Wednesday 27 April.  Available at: http://www.guardian .co.uk/business/2011/apr/27/johnson-johnson-buy-synthes. (Accessed:  28-4-2011)

Agrawal, A. and J. Jaffe (2000). ‘The post merger performance puzzle’, Advances in Mergers and Acquisitions, 1, pp. 119-156.

Cartwright, S. and Schoenberg, R. (2006) ‘30 Years of mergers and acquisitions Research: Recent Advances and future opportunities’,

British Journal of Management, 17 (1), pp S1-S5.

Krug, J. and R. Aguilera (2005). ‘Top management team turnover in mergers and acquisitions’, Advances in Mergers and Acquisitions, 4, pp. 121-149.