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Chapter 14. Mergers and Acquisitions (M&... > Do Mergers and Acquisitions Create V...

Do Mergers and Acquisitions Create Value?

Although there are various methods of executing mergers and acquisitions, a few general outcomes of such transactions may be pointed out. First, a merger resulting from the combination of unrelated investments (conglomerate acquisitions) does not necessarily yield positive returns for the acquirer's shareholders. The reason for this is that the acquirer's shareholders can usually buy the shares of companies similar to the target by themselves, and the fact that the acquirer's managers compel them to participate in the investment reduces the attractiveness of the acquirer altogether. Obviously, this principle does not apply if indeed the acquirer has managerial abilities which may be implemented in different fields. However, such situations are quite rare, and among the past conglomerates, General Electric is probably the only successful one.

However, on average, companies which are conglomerates are traded at a discount compared to the sum of the values of the companies they manage, mainly due to the additional managerial and administrative costs which result from the difficulties in managing diverse and unrelated businesses.


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