Factors Affecting The Effectiveness Of M&A Deals

The development of the M&A market confirms the interest of company management to expand their business through integration.
The number of deals is growing every year, despite the claims of some researchers that M&As are not primarily beneficial for the acquiring company. The study of factors influencing the effectiveness of integration deals is a topical issue today.

There are external and internal factors that affect the effectiveness of an M&A transaction. External factors include macroeconomic factors (interest rate, exchange rate, etc.). Internal factors include characteristics of the planned transaction (method of payment, industry focus of the transaction, friendliness of the transaction, competition among buyers), as well as factors of the target company and the buyer company (size of the buyer, size of the target company, etc.). Let’s look at the main factors:

Transaction amount. There is an opinion that large deals lead to a change in the originally chosen development strategy of the company, which carries certain risks for the acquiring company. The authors of the research believe that in smaller deals to make preparations and mobilize resources, it is much easier to implement the integration process. Thus, according to the authors, purchases of less than $20 billion are significantly more profitable than large purchases (Thomas J. Herd, Ryan McManus. Who says mergers and acquisitions are unprofitable? — Accenture Outlook Journal, 2012.)

2. Type of merger. As a rule, those companies that belong to the same industry have less difficulty in mergers. Many businesses try to avoid taking over completely unrelated companies, but the creation of conglomerates in mergers and acquisitions can diversify the business, making it more sustainable. Therefore, some experts believe that the takeover of an enterprise from an unrelated industry has a positive impact on the effectiveness of the transaction.

3. Shareholding. The share of shares in the target company owned by the acquiring company determines the level of control acquired. Determining the level of control is only necessary if the company has multiple owners. The level of corporate control affects the company’s performance and, therefore, affects the effectiveness of the post-merger transaction. As such, it can be assumed that the greater the control, the more it improves efficiency.

4. The nature of the transaction. Companies that agree to a merger or takeover can solve an upcoming problem more quickly and effectively than when the merger/acquisition is not friendly. As part of a friendly merger & acquisition, companies tend to act together, thus their joint activity is more efficient.

Therefore, in mergers and acquisitions, it is very important to consider both external and internal factors that impact the effectiveness of M&A transactions. Low financial performance of the acquiring company is an indicator of ineffective management. Ineffective management will have a strong negative impact on the merger value creation.