The Popularity of Merger and Acquisition Strategies

  The acquisition strategy has been a popular strategy among U.S. firms for many years. Some believe that this strategy played a central role in an effective restruturing of U.S. business during the 1980s and 1990s and into the 21st century. Increasingly, acquistion strategies are becoming more popular with firms in other nations and economic regions, including Europe. In fact, about 40 to 45 percent of the acquisitions in recent years have been made across country borders(i.e., a firm headquartered in one country acquiring a firm headquartered in another country).For example,40 percent of Wal-Mart's international growth had come through acquisitions, and management remains open to further acquisitions.

Five waves of mergers and acquisition took place in the 20th century, with the last two occurring in the 1980s and 1990s. There were 55,000 acquisitions valued at 1.3 trillion dollars in the 1980s, and acquisitions in the 1990s exceeded 11 trillion dolllars in value. World economies, particularly the U.S. economy, slowed in the new mullennium, reducing the number of mergers and acquisitions completed. The annual value of mergers and acquisitions peaked in 2000 at about 3.4 trillion dollars and fell to about 1.75trillion in 2001.However, as the worldwide economy improved, the global volume of announced acquisition agreements was up 41 percent from 2003 to 1.85 trillion dollars for 2004, the highest level since 2000,and the pace in 2005 was significantly above the level of 2004.

Although the frequency of acquisitions has slowed,their number remains high. In fact, an acquisition strategy is sometimes used because of the uncertainty in competitive landscape. A firm may make an acquisiton to increase its market power because of a competitive threat, to enter a new market because of the opportunity available in that market, or to spread the risk due to the uncertain environment. In addition, as volatility brings undesirable changes to its primary markets, a firm may acquire other companies to shift its core business into different markets, Such options may arise because of industry or regulatory changes. For instance, Clear Channel Communications built its business by buying radio stations in many geographic markets when te Telecommunications Act of 1996 changed the regulations tegarding such acquisitions. However, more recently Clear Channel has been suggested to have too much market power and is now likely to split into there different businesses.

  The strategic management process calls for an acquisition strategy to increase a firm's strategic competitiveness as well as its returns to shareholders. Thus, an acquisition strategy should be used only when the acquiring firm will be able to increase its value throgh owership of an acquired firm and the use of its assets.


However,evidence suggests that, at least for the acquiring firms, acquisition strategy may not always result in these desireable outcomes. Researches have found that shareholders of acquired firms often earn above-average returns from an acquisiton, while shareholders of acquiring firms are less likely to do so, typically earning returns from teh transaction that are close to zero. In the latest acquistion boom between 1998 and 2000, acquiring firm shareholders experienced significant losses relative to the losses in all of the 1980s. Acquiring firm sharholders lost 0.12 dollar on average for the dollar spent. This may suggest that for large firms, it is now more difficult to create sustainable value by using an acquisiton strategy to buy publicly traded companies. In approximately two-thirds of all acquisitions, the acquiring firm's stock price falls immediately after the intended transaction is announced. This negative response is an indication of investors'skepticism about the likelihood that the acquirer will be able to achieve the synergies required to justify the premium.