Does M&A create shareholder value?

What do we know about mergers and acquisition (M&A)? M&A gives a company a chance to enlarge their company when it seems that their company cannot grow further or is dependent on the company to expand its existence. It can be a threat to other company as if another company wants to merge and takeover your company, you lose your independent existence.  Here are some of the reason why M&A is an important role in a company.  It can be an entrance to new market, to eliminate inefficient management and to increase market power and share.

M&A happens mainly because of synergies between two companies which give a higher value when the transaction cost is lower than the gain.  Royal Dutch Shell is an Anglo-Dutch multinational oil and gas company and is the fourth largest company as of 2014.  Shell is vertically integrated because it has combination between firms at different stage and is active in area related to oil and gas.  Shell has the decision to take over BG Group. BG Group is also a multinational oil and gas company but is not as big as Shell.  Shell believes that taking over BG Group will benefit in terms of economies of scale, where larger size leads to lower cost and savings from the sharing of central services. 

When two companies are joined together, it gains cost efficiency because M&A will be a new and bigger company now, so the production is done on a much larger scale. So, when output production increases, cost of production of output may be reduced.  The merging of Shell and BG Group could be known as a horizontal merger because they are of the same production which is oil and gas. 

But what if this merging and acquisition is not successful?  This leads to the confidence level of CEO of Shell because many shareholders and stakeholders are doubtful of the takeover.  If the CEO of Shell over-estimated their ability to generate returns, it means that Shell is destroying the value of merging the two companies where it destroys the value of Shell and BG Group as well. 

As a conclusion, many companies think that M&A plays an important role in the company, but is it really good for the company against the little decision that has been made throughout the whole process? Despite the many benefits of M&A, there are drawbacks as well. For example, the overconfidence of CEO.  In my opinion, the pros can only be benefitted if CEOs considered all aspects of M&A before getting the real deal and should not be overconfident as it might worsen the company’s image hence lowering shareholder’s value.