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Finance Series: corporate-finance

The Economic Impact of M&A - Implications for UK firms

M&A deals are complex and challenging transactions that arguably represent the most significant investment a company can undertake. This paper draws some important conclusions regarding the impact of mergers and acquisitions in the UK.

Author(s): Professor Scott Moeller - Cass Business School; Dr Valeriya Vitkova - Cass Business School; Professor Andrew Clare - Cass Business School; Anna Faelten - Cass Business School; Maria Carapeto - Cass Business School

The motives for participating in mergers and acquisitions can be divided into two categories: economic and strategic. The economic motives for deal-making have the explicit goal of creating value for the acquirer's shareholders, by realising synergies through the generation of additional revenue and/or cutting costs, thereby increasing profits. Strategic motives can be defined as those that aim to improve the strategic positioning of the firm in order to achieve long-term growth, or as protection against volatile and challenging economic conditions in the region or sector in which the acquirer operates. Despite these sound rationales for engaging in M&A activity, the question of whether it generates positive economic value for UK corporates remains disputed.

This study provides important and valuable insights for companies regarding corporate takeovers. It shows that acquisitions are challenging and complex corporate activities that have the potential for destroying value in the long run. However, the findings reported here also indicate that not all M&A transactions lead to value deterioration. In fact, the acquisitions that are successful add significant value to the business. The results suggest that management teams should consider the timing of their acquisitions, since it appears that those acquirers who announce an acquisition when their own share price is at a performance peak in comparison to the equity index can suffer if they buy overvalued targets as, over the long term, these deals result in the destruction of value. The fact that acquirers experience both lower labour costs and a lower level of output following M&A activity shows that companies should refrain from building synergy strategies based on an expectation of lowering their cost-per employee.

The Department for Business, Innovation and Skills (BIS) in the UK, asked the M&A Research Centre (MARC) at Cass Business School to investigate the efficacy of UK M&A activity as a strategy for growing and enhancing the profitability and efficiency of UK businesses. The full published report can be downloaded at the MARC section of the Cass Business School website. A short registration form must be completed.

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