Weighing In: Do M&A Deals Add Value?

Excel Spreadsheet stats graph analytics data. Accountant hands holding Financial Document Trading Information with excel file. Finance statistic report analyze business graph, chart,database,report.

The organization you lead is doing well overall. International trade changes along with on-and-off recession concerns create pricing challenges for companies. Some are interested in pursuing mergers or acquisitions (M&A) to both appease current shareholders as well as attract new ones. To best guide client businesses, we have decided to weigh in on the current pros and cons of M&A deals.

Pros Regarding M&A Deals

A merger involves one company acquiring another to extend its reach and market potential. This happened in 2017 when Amazon acquired Whole Foods. On a more local level, an acquisition may occur when a large telecommunications firm purchases another with more limited service range and capabilities.

In either case there are pros for each company.

  • Existing infrastructure creates expedient expansion and upgrades.
  • Consumers see the benefits of expanded services in the form of improved pricing, as is the case with retail bulk buying and distribution.
  • Each company’s strengths add to overall value.
    • A smaller business gains from large scale management expertise and systems.
    • A larger business gains from the smaller firm’s assets, such as technological innovation.
  • Increased profits contribute to research and development.

Cons Regarding M&A Deals

  • Leadership changes for either company can destabilize operations for months or more.
  • The potential loss of jobs within a sector or region.
  • Negative effects on markets, such as loss of services for local areas.
  • The potential for increased prices and service changes for consumers, particularly if the merger creates a monopoly.
  • Economies of scale may falter if communication, coordination, and efficiency lag.

Shareholder Value: What to Expect

Mergers affect both companies with shareholders seeing stock volatility as the acquisition is implemented.

  • Stock value of both companies is likely to experience alterations until the merger stabilizes.
    • The acquiring company’s stock is likely to dip in value.
    • The merging company is positioned to see a temporary increase.
  • Shareholders experience a period of voting instability related to stock distribution.
  • Board composition will shift in terms of numbers and representation.
  • Successful acquisition of a company within the midst of economic promise is likely to lead to stock gains. 

Click here to find out about DLC’s M&A Due Diligence Support and other services.