Weighing In: Do M&A Deals Add Value?

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.