Mergers and Acquisitions (M&As) are on the rise once more and hardly a day passes by without us noticing news of them. Rochester in recent years has been a focal point due to some of the most high-profile M&A activities linking directly to its local economy: the highly controversial back and forth between Xerox, Fuji, and its shareholders; The L3-Harris merger; Constellation Brands’ gradual stretch to take over Canopy Growth; Sprint and T-Mobile merging with call centers to be located in Henrietta.
On a more national stage, United Technologies is about to follow up on its quite recent $23 billion acquisition of Rockwell Collins and has announced plans to merge with Raytheon, another mega-merger aimed at creating a $100 billion giant in the defense industry. Contrary to past market reactions to M&As which have been on the conservative and even skeptical side, the United-Raytheon merger is being met with positive market sentiments. It’ll be worthwhile to better delve into the strategic incentives, motivations, implications, and repercussions behind M&A activities, if you are approaching them from an investor’s standpoint.
While there is overwhelming evidence regarding destruction of shareholder value following most M&A cases, this is not a general rule. However, executives of companies engaged in M&As will try their very best to convince shareholders that the decisions they make are in the best interest of the company, and of course, the shareholders. To further illuminate the issue, I’ve put together a list of important factors that one should consider when assessing the promised value and logic behind M&As.
- Make sure M&As are not a scapegoating mechanism: A main criticism on performance of CEOs is their lack of strategic action. Shareholders are interested in seeing the management in charge of their investment take calculated and strategic risks in order to beat the market average. However, the prevailing number of CEOs are focused on not making huge mistakes in order to maintain their position, rather than leading their companies into a brighter future. When shareholders are fed up with mediocre and lackluster performance, most of those CEOs start looking for the easiest strategic actions available to them: acquiring what’s ready, already. Through an acquisition, or a merger, a CEO may claim credit for a strategic initiative that really has nothing to do with his/her competence in building strategic capacities. This option can give them often undeserved credibility, while in some cases, even allowing them to exercise stock options that have reached early maturity.
- Understand the nature of the industry: Although M&As may be quite value destructing for shareholders in most industries, this may not always be the case. Industry dynamics, industry regulations, and industry growth may all be factors. Take the defense contracting industry as an example. There’s quite a handful of companies that are playing the role of main partners/suppliers to the US government. This is quite understandable. Defense-related technologies are often sensitive and could impact national security if they fall into the wrong hands. This means that trajectories of growth in that industry are quite curtailed by restrictive regulations that are absent in many other industries. However, despite this downside, there is also a huge upside. Restrictions imposed from up above are also an important factor in raising barriers to entry, which in turn means that there are fewer competitors. Now in that universe, if there is consolidation among suppliers through M&As, this means that they will have greater bargaining power over their biggest buyer: the US government. And this has been the case. United Technologies acquired Rockwell Collins, then L3 and Harris merged, now United is merging with Raytheon. Interestingly, we have yet to hear back from the Department of Justice (DOJ) weighing in or blocking any of these M&As, as it has been so in some other instances. If DOJ stays silent, as it has, there are bigger waves of M&A to come and all for good reason: gaining more market power.
- Assess global trends and risks: We are living in a time that we are able to observe first-hand the process of “structuration” of the global economy. Any institution — whether global, regional, or local — will go through many phases of structuration and re-structuration. The global economy is no exception. The trade wars that we currently observe are merely efforts made by powerful institutional actors to redraw and redefine institutional arrangements in their favor. In this process, however, the fluctuation will inevitably have impact on businesses operating on a global stage. Take Apple Inc. and Huawei for examples. Both of these tech giants are now suffering consequences of these trade wars; one resulting from reliance of production in China, and the other due to expected decline in international sales. On June 16, Huawei announced that they expect close to $30 billion in lost sales that is resulting from rolling back their growth expectations. Similar situations can create a strong incentive for companies to quickly relocate or spread out their operations into environments that are less intensely in the line of fire in this escalating global trade war. M&As can be an effective way for market entry due to their time efficiency.
There are many reasons to be skeptical about M&As. I, for one, tend to be on the skeptical side when it comes to either motive or justifications. Even if motive and justification are both solid, the post-merger integration (PMI) often turns out to be cumbersome, hefty, and complex. CEOs will use every possible showmanship to sell the idea to their shareholders that M&As are in their best interest and market analysts focused on the short term will provide their stamp of approval. Despite that, you cannot rule out an M&A unless you’ve made a full, clear and logical assessment of its merits.
Pouya Seifzadeh is an Assistant Professor of Strategy at State University of New York at Geneseo.