Whether M&A activity benefits the economy is often debated by economists, politicians, journalists, and people in the street. The reality is that there are as many answers as there are deals and vantage points from which to argue. A merger may be good for shareholders of both the acquiring and acquired companies but bad for the economy if it creates a monopoly position detrimental to consumers. An individual who loses his or her job or a town that loses its main plant to merger cutbacks are not immediately (and may never be) better off than they were. Conversely, real improvements in efficiency can lead to higher quality and less costly products. The economy overall is likely to be more vibrant, opportunity-rich, and create more jobs if resources are continuously moved out of lower value uses into more profitable ones.
That said, our main concern is creation of value for shareholders. Anyone considering an acquisition needs to understand the basic fact that many corporate acquisitions fail to increase shareholder value. The market for corporate control is fairly efficient: easy, good deals are hard to come by, if they exist at all. Most successful deals result from highly disciplined deal making—and sometimes just good luck.
Two broad types of research provide this warning. Academic studies typically look at the ex ante market reaction to the announcement of a deal, taking into account not only expected costs and benefits of the deal, but also the market’s expectation of whether the deal will actually be consummated. This approach assumes the market is smart and able to size up the price paid, potential synergies, and integration ability of the managements involved to arrive at an unbiased estimate of the likelihood of a deal adding to the value of a company. Another analytical approach is ex post, assessing merger programs after their completion—looking back to see how what did happen compares with what had been hoped for.