Companies pursue Mergers and Acquisitions (M&A) for many reasons with the oft quoted rationale being synergies. Therein lies the problem. There are only so many reasons to pursue M&A and those reasons have to create actual synergies, not merely being cloaked within the term synergy.
In simple terms, synergy is a situation whereby the combination of the two entities is greater than when they are separate whereby the whole is greater than the sum-of-the-parts meaning it is a nonlinear relationship. Moreover, the 6 types of M&A pursued 1. Vertical, 2. Horizontal, 3. Complimentary, 4. Strategic 5. Geographic and 6. Growth must create value where the M&A in combination is greater than 1) If the M&A never occurred and/or 2) The sum-of-the-parts. Value will accrue to the combined entity when 1) The price paid is less-than-or-equal-to the sum-of-the-parts, 2) The manner of financing is lower than the return on invested capital (ROIC) and 3) Real synergy is A) Greater than expected and/or B) Realized sooner than anticipated.
There are many large companies that have competitive advantages whom find it difficult to increase top-line growth merely as a result of their size. In these instances, they may pursue M&A merely as a means to boost top-line growth, however, this does not deliver any synergies and the benefits are shortlived.
Companies will also pursue M&A and drastically cut costs which, in conjunction with the leverage employed, boosts ROE and earnings in the short-term. However, this too, does not provide any real synergies. Merely leveraging a company and drastically reducing headcount and wringing out inefficiencies does not provide synergy or value.
Part 2 will discuss the implications of the 6 types of M&A. Please refer to the following reports:
🔺How the Economy Works, New Credit Creation, Borrowing vs. New Credit Creation, Velocity of Money, Real vs. Financial Economy, & The Catch-22 of Leveraging/De-Leveraging https://internationalcapitalmarkets.org/2019/10/23/%f0%9f%94%bahow-the-economy-works-new-credit-creation-borrowing-vs-new-credit-creation-velocity-of-money-real-vs-financial-economy-the-catch-22-of-leveraging-de-leveraging/
🔺 Pace of Hyper-Globalization as Analog for Automation, Forced Displacement, Social Safety Net, and Job Placement/Transitions https://internationalcapitalmarkets.org/2019/10/13/%f0%9f%94%ba-pace-of-hyper-globalization-as-analog-for-automation-forced-displacement-social-safety-net-and-job-placement-transitions/
🔺Market Structure Asymmetry, Information Flows/Asymmetries, Sell-Side Catch-22’s and How this Limits Current Valuation Models https://internationalcapitalmarkets.org/2019/09/22/market-structure-asymmetry-information-flows-asymmetries-sell-side-catch-22s-and-how-this-limits-current-valuation-models/
🔺Businesses are Innovations in and of Themselves and Job Creators https://internationalcapitalmarkets.org/2019/09/12/businesses-are-innovations-in-and-of-themselves-and-job-creators/
🔺A Businesses’ Greatest Costs are Intangible in Nature https://internationalcapitalmarkets.org/2019/09/07/a-businesses-greatest-costs-are-intangible/