Are Mergers and Acquisitions Good?

Over the last few years, the phenomenon of merger activity has been rising and then subsiding to more pedestrian levels for a long period of time as observed in many countries. High levels of merger activity tend to occur at peaks in economic activity followed by a sustained period of growth that is usually accompanied by stock market exuberance (Mathews, 2013). 

One of the most recent mergers has been between Facebook and WhatsApp, which shocked the technological world last month, mainly because of the price tag put on WhatsApp. According to BBC (2014), Facebook bought the messaging app in a deal worth over $19bn (£11.4bn) in cash and shares. However, many people have questioned this acquisition. Why would Facebook spend so much of its cash and stock on WhatsApp? The motives of Zuckerberg moves are still quite unclear.

According to The Independent (2014), Steve Ballmer the former chief executive of Microsoft has questioned Zuckerburg’s decision and the value of Facebook’s $19bn purchase of WhatsApp. The internet-based messaging app has 450m users who are charged $1 a year for subscription, thus leading to questions over whether this deal has been justified. Ballmer alongside many other people are not sure whether the ‘messaging service will make enough money to justify its price tag’, He believes that sometimes having a lot of people sign up could represent the usage of the app, however this could be a false metric. He questions whether ‘those 450m people ever generate enough revenue?’. This is an important and valid point to consider.

However, Zuckerberg would argue with this as he claims that Whatsapp is worth over $19bn and also that this acquisition will help billions of people to access the internet. It is obvious that Facebook wanted both WhatsApp’s users and its management team on Facebook’s side. This acquisition brings many benefits such as increasing value and efficiency, which become greatly important. Also this merger may allow for greater investment in R&D. This is because the new firm will have more profit that can be used to finance any risky investment from taking place within the company.

So will this acquisition be successful? We will have to wait and see what happens.

There are many examples of successful M&A’s. For example, the merge between Disney and Pixar was a “match made in cartoon heaven” (CNBC, 2014).  With the merger, these two companies were able to collaborate freely and easily. But did this merger actually work? Yes, it did. The company has an average revenue growth of 6% and an average EBITDA growth of 11.7% (Kerr, 2013). According to Barnes (2008), most acquisitions especially in media are value destroying as opposed to value creating. However, this is not the case for Disney and Pixar. Investor confidence has increased, as the company is able to overcome a difficult economy by leveraging Pixar’s computer-generated characters across the empire. In relation to Figure 1., the company remains successful to this date as the constant increase in share price is shown.

Figure 1. Walt Disney Share Price

(Financial Times, 2014)

However, not all M&A’s are successful. For example, in 1998 Mercedes-Benz manufacturer  of Daimler Benz, merged with US auto maker Chrysler to create Daimler Chrysler in a $37 billion deal. Cultural clash was the main reason for failure of this merge. Chrysler was nowhere near in the league of high-end Daimler Benz (CNBC, 2014).  Operations and management were not successfully integrated because of the entirely different way in which Germans and Americans operated. It was apparent that Daimler-Benz’s culture stressed a more formal and structured approach towards management, whereas Chrysler favoured a more relaxed and calm style (Weber & Camerer, 2003). In the months after the merger, the stock price fell by roughly one half before the immediate post merger. The Chrysler division was more profitable prior to the merger, however started to lose money shortly afterwards (CNNMoney, 2001).

Therefore going back to the question “Are Mergers and Acquisitions Good?” it would be plausible to suggest that if the right management decisions are made, M&A’s can be successful. However, if the wrong decisions are made as seen in the Daimler Chrysler example, then mergers are likely to fail.