When the world’s richest man makes a move to buy one of the biggest social media platforms on the planet, it is going to make headlines. Elon Musk’s dramatic hostile takeover attempt of Twitter has shone a light on the world of Mergers & Acquisitions (M&A).
But what are the drivers of these deals and who ultimately benefits?
A guiding principle of any M&A deal is value maximisation; does the deal benefit the shareholders of the acquiring company and those of the target company?
But there are also benefits and costs for wider society, including employees, consumers, the local community, the environment, the tax authorities and so on.
So, do mergers and acquisitions create or destroy value?
There are compelling reasons why both these things could happen.
In the short term
In the short term, when a business is targeted for takeover, the share price generally goes up by 15 to 20 per cent, and in some cases even by significantly more, which definitely creates value for the shareholders of the target company.
But what about the acquirer?
Here the evidence is not as clear cut.
Past evidence shows a very small negative or positive reaction affecting the stock of the acquirers. That’s not particularly damaging, but it’s not particularly beneficial either.
And what about society?
There is much concern around so-called ‘killer acquisitions’, where a company that dominates its sector quickly acquires any new entrants in order to eliminate the competition.
While this can benefit the shareholders of the acquirer and the acquired companies, it reduces competition, which is bad for consumers and can deter innovation.
In the long term
Looking at the longer term, takeovers can generate efficiencies that can benefit both society and shareholders because they create more efficient companies that can sell their products at a lower price.
On the minus side, a takeover can also work to create a bigger company that has more market power and can charge higher prices to consumers.
That creates value for shareholders, but is less positive for society.
Managers of acquiring companies can also pursue takeovers because it gives them leverage to demand a higher compensation for leading a larger business.
In this case, the acquisition does not create value for the shareholders - just for the manager.
So, we can see that this is a very complex issue, with a diverse range of possible outcomes.
This is exactly the kind of topic we focus on in our MSc in Financial Management, and our approach centres not on complex theoretical constructs, but rather on practical applications.
That could mean using data on current events, like the Twitter takeover, or even analysing acquisition opportunities in students’ own companies - developing real life solutions to real-life challenges.
Read more about the kind of subjects we cover in our MSc programme in Financial Management at Alliance Manchester Business School.