Mergers and Acquisitions BP-Amoco-Arco Exxon-Mobil Time Warner-EMI National Westminster-Royal Bank of Scotland GEC-Honeywell

Mergers and Acquisitions What is a merger? A+B=C What is an acquisition (takeover)? A+B=A In economics the terms merger, acquisition and takeover are used interchangeably.

Acquisitions and mergers by UK industrial and commercial companies: 1970-98 Expenditure (£bn) Number of companies acquired fig Source: Financial Statistics (ONS)

Cross-border majority mergers and acquisitions targeting an EU company Source: Based on information provided by Thomson Financial Securities Data

Classifying Merger Activity Hostile or Friendly? Contested not Contested? Horizontal, Vertical or Diversifying (Conglomerate)? Paid for by Cash, Stock or Mixture?

Motives for Merger Profit Cost savings Growth Diversification Ease of entry to new market (geographic or product, home or abroad) Market share

Who Gains? Gains to victim accrue from any appreciation in share price assuming that bid and/or final price > market price. Gains to acquirer accrue from expected performance improvements. These are difficult to quantify - you will never know what would have happened to BP had it not acquired Amoco.

Economic Measurement of the Gains Cost based - rare Market share studies - rare Profitability studies - reliability of accounting data. Share price studies - time frame crucial.

Outcomes and Evaluation The majority of studies show that the major beneficiaries of merger activity are the shareholders of the acquired firms. This could be because managers are opportunistically pursuing growth. It could also be explained by Roll’s hubris hypothesis.

Mergers Prospective mergers must satisfy the relevant regulatory bodies (UK and EU in the case of the UK). Referral often causes bidder to pull out. Looser forms of inter-firm collaboration exist - joint ventures and strategic alliances. Are these optimal or transitional?