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E-book The Merger Mystery : Why Spend Ever More on Mergers When So Many Fail?
In our college days, the economics tradition was pretty confident about the outcome to be expected from merger and acquisition. Adam Smith, the revered grandfather of modern economics, while not addressing M&A directly (there was scarcely any at the time), had in 1776 identified potential sources of gain which are standard elements of merger proposals today: securing scale economies, replacing weak management, and enhancing market power.He drew attention to the scale economies which could be achieved through the division of labour when small-scale production was replaced by larger factory organisations. In his famous example of the pin factory, output per man per day for the individual pin-maker working at home was 24 pins (Pratten 1980), whereas his counterpart in a 1776 factory with specialised functions produced 4,800 pins. Greater scale through consolidation brought lower unit cost twenty-first century example is offered by the vehicle manufacturer Volkswagen. After a string of acquisitions, including Audi, Porsche, Scania, Seat and Skoda, it was the world’s biggest producer of vehicles—some 10 million a year. Shared components for the different subsidiaries could be produced in specialised units at unprecedented scale and reduced cost. Likewise, the fruits of R&D could be shared across the combine. his problem—which nowadays goes under the heading of the ‘principal-agent’, or ‘corporate governance’, or ‘stewardship’ problem that arises when management is divorced from ownership—also suggested an opportunity. A potential source of profit from M&A, and gain in economic efficiency, would result from a ‘turnaround’ merger, where stronger management gained control of an underperforming firm, boosting its profit and increasing its valuation. ‘The potential return from the successful takeover and revitalization of a poorly run company can be enormous’, wrote Manne (1965, p. 113).
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