Mergers and Acquisitions; impossible dream?

This week’s lecture was about mergers and acquisitions. Having previously read that 70% of mergers go badly (Forbes.com) leading to a potential destruction of shareholder wealth; why would any CEO decide a merger or acquisition was better than an alternative investment?

The Guardian (British M+A dealmaking at four-year high) shows that during the first period in 2011 the demand for mergers and acquisitions was there, especially in the energy markets with BP’s investment in the oil fields owned by India’s Reliance Industries and Ensco’s takeover of Pride International.

BP’s interest in an investment in India is prudent due to the current economic growth rate of India (www.bbc.co.uk India growth rate rises to 8.8%) which increases demand for oil production. This merger will maximise shareholder wealth by moving into a high demand market increasing market share.

This merger decreases BP’s reliance on the oil fields in the uncertain Arab nations due to the recent uprisings and the possibility of the contagion spreading to other oil rich dictatorships. BP’s merger hasn’t yet been finalised but it would be an example of a horizontal merger as it deals in oil refinery.

The tutor gave us a challenge to find a successful vertical merger. My example would be the merger between Alliance and Boots Plc in 2006. Alliance produces pharmaceuticals and through merging with Boots Plc it reduced its reliance on outlets for it’s products therefore reducing costs and maximised shareholder wealth to both Boots and Alliance now known Alliance Boots Plc and trading at 1986p per share an increase of nearly 1300p per share.

This example shows that when a merger goes well it maximises shareholder wealth by double and this is what all CEO’s should be trying to attain.