Mergers Can be Beneficial

The chairman of “AdvancePierre” and advisor to the same, Dean Hollis links the aggressive acquisition of company by “LandShire” with the growth in product and innovation and emphasizes on the importance of this acquisition plan as being growth driven both for the customers and strategic partners of AdvancePierre. Even though this is the second time they are being acquired by some other company during last three weeks.

The mergers no doubt are found very effective in many ways, that they help two producers to merge and pool their capabilities in order to enjoy the synergy effect and economies of scope or scale whatever the case may be, because there will be sharing of diversified skills and activities from both companies and will result in closing the gap that was there before the merger.

Such mergers no doubt are also important for key stakeholders of the company which is being acquired as they will be under a larger and safer roof now, and resultantly they will be on a more profitable end.

Further, mergers are also helpful for the economy, this can be said if such acquisitions turn successful they will be making a larger sum of profits now than both the companies were making separately before. Therefore a profitable merger always adds to the economy by displaying positive results which will be a building block in calculating National Income. The other aspect of such mergers is obviously an increased total output of the economy i.e. a higher GDP level.

Besides the merits of merger, there are many disadvantages of such mergers as well, like it may lead to large amount redundancies therefore promoting an increased unemployment level which obviously cuts down the National Income level.

Such mergers may result in cartels and monopolies, if the mergers are at a larger level. The cartels and monopolies are considered unfavorable for society as they charge discretionary prices from the consumers.

If we see the mergers, they are by far beneficial for society and economy as it can; support the weak business, ensure continuity of employment level or an increase therein may be, greater quantity of products and services etc., therefore, if such mergers are regulated for their negative impacts on economy, they can be very helpful for the society and economy.

But there arises a series of questions, when mergers occurred so frequently as was used by ‘AdvancePierre’ would it help growing? Would it not send a message that there may be some risk attached to “Advance Pierre”? And the list of such questions is not exhaustive.


Dave Tufte said...

Judy: 76/100, (You wrote that Landshire acquired AdvancePierre when it was the other way around, you wrote that it was the second time some firm was acquired when it was the second acquisition by AdvancePierre, you misspelled AdvancePierre, you have many run-on sentences, plus many others).

Judy: write better and write less. There isn't any minimum word count you need to reach, so work on expressing your ideas.

In what sense was the acquisition "aggressive"?

I don't know that Landshire can expect to be more profitable. Just because they are "under a larger ... roof" does not necessarily make it safer or more profitable.

Eliminating redundancies should not reduce GDP. If they are truly redundant, GDP should stay the same.

It's not correct to say that the prices charged by monopolists are discretionary. Instead, note that a monopolist's price includes a mark-up shifts some surplus from consumers to producers.

Economies of scale and scope are different things, and shouldn't be so casually thrown together.

Generally, merging for the purpose of diversifying skills is bad idea for owners (who have better ways to diversify) but a good idea for managers (who make their jobs safer).

It's not clear that a merger is beneficial to GDP just because the new firm makes more profits. It may have done so by reducing costs. In both cases, the revenue of the firm (that is counted in GDP) would be the same, while the costs go down and the profits go up.

Andy Dufresne said...

If I understand you correctly, you are arguing that aggressive acquisitions by one company are most likely detrimental in an overall sense, and will lead to cartels or monopolies. Mergers can be good or bad depending on the situation. I agree with you that multiple acquisitions by one company can be construed as risky, since that company would encounter problems while integrating all those companies into one conglomerate and identifying the synergies in the combined company. This should put up red flags for anybody thinking of investing in this aggressive company, as the company could quickly get in over their heads. On the other hand, there are numerous papers outlining the positive effect these mergers have on the company/industry (for example, see this paper) and at least one paper has highlighted that certain synergies that can be identified through mergers are key drivers for how a company will act (this paper highlights technology as one example of a driver). So your question really is what the “correct” number of mergers is and what is the “correct” timing for these mergers? I would think the answer to this question will be so specific to the company, as well as the entire industry, that we will not be able to come up with one answer that would apply to every company. Therefore, you have to analyze the situation for one company at a time, and this is exactly what any good board of directors does. They look for opportunities and, if there are a lot of opportunities and you have a lot of cash, then maybe you can make a case for a rapid acquisition of several companies in a short period of time. It all depends.

Bronson said...
This comment has been removed by the author.
Bronson said...

My goal here is to explain why not all mergers are beneficial (except to shareholders), especially those which combine companies that exhibit monopolistic behavior on both a local and national basis. I'd like to spend a little time reflecting on my personal experiences with one of the largest mergers in U.S. history, mainly of Southern Pacific Railroad by Union Pacific Railroad which was approved by the Surface Transportation Board in 1996. Railroads are the backbone of our nation's economy, shipping everything from coal for power plants, grain for bread, and UPS/Fedex ground packages. The SP/UP merger came on the heels of another mega railroad merger between ATSF Railway and BN Railroad, resulting in the BNSF Railway in 1995.

A good high-level overview of the railroad industry and generally positive impact can be found here: FTC Discussion on Benefits of UP/SP Merger. For those who don't have the time to read the article, proponents of the merger felt UP saved the "financially weak" SP from deferring maintenance on its tracks and equipment, thereby eliminating slow transit times for any business that ships by rail before the bad track and equipment slowed the trains down. Unfortunately, the article is very one-sided in favor of the merger.

In order to "pay off" railroad shippers, UP made it clear the merger would reduce their shipping rates (yeah right!!!! check is in the mail! ). The matter of fact is the shippers were lied to by UP. Adding fuel to the fire, when the acquisition of SP by UP did take place, the combined operations were so disorganized the UP became a literal parking lot for 300-400 trains worth $500+ billion USD... all destined to organizations and companies who would transform those products into finished goods. The problem: the raw materials and intermediate goods were not moving! A very critical article on the UP/SP merger can be found here:UP/SP Meltdown . Things for shippers got so bad, the company name of UP (Union Pacific) became known as Unlimited Parking. One day on a drive from Iowa to Chicago, I counted fifty trains stopped that hadn't turned a wheel for two days or more! One more item to note: that shipper rate decrease promised by UP never happened. In fact, when I compare UP rates between 1990 and 2015, they have increased 180% on average. So much for the benefits of a merger.

To summarize, my own personal experience with mergers in a monopolistic environment is sad and problematic: service actually decreases, prices rise, and customers get lost in the crowd. Careful consideration must also be paid to whether or not the merger candidates lie to key constituents for the purposes of ensuring approval of a merger.

Dave Tufte said...

Andy: 50/50

Andy, I'm not sure if your comment is directed at me or at Judy. Me, I think.

I am saying that overly aggressive mergers and acquisitions (M&A) are a bad thing. I am not saying this is because they lead to cartels or monopolies (although this can happen). More specifically, I'm saying that M&A benefits managers at the expense of owners.

And the literature has many more articles about the performance of M&A. The whole synergies thing is easier to talk about than to actually produce in practice. But I think what's important is that people are actually focused on synergies; it's evidence that most of the other motivations for M&A have been shown to be lacking in performance.

I also think that it's a good thing that more Boards than before avoid exactly what you're suggesting. When you say "...If there are a lot of opportunities and you have a lot of cash, then maybe you can make a case...", I think the evidence points to lots of cash actually leading to people thinking the opportunities are better than they actually are. The trend of Boards to encourage dividends or stock buybacks is probably a much better strategy.

Dave Tufte said...

Bronson: 50/50

That's an interesting story about something I know very little about. I have two additions.

First, the problem with this sort of evidence is that we can't rewind it, and then run it forward with different decisions to see if it turns out better or worse.

Second, all transportation industries ultimately show themselves to be unprofitable without some increased degree of concentration. So again, a merger was going to happen eventually, but I'm not sure if it should have been this one.

ty said...

I think it is interesting that we could have a debate about the benefits of mergers. I think that if we were to do an analysis on mergers the resulting statistics would tell a similar story to most other business ventures. Most new businesses fail within the first few years. This seems like common knowledge so I won’t site a particular article. My guess is that the statistics for mergers are fairly similar. A merger is creating a new entity. Just like creating a whole new entity there is substantial risk to creating a new one through mergers. I believe that the same benefits and costs associated with the creation of new companies exist for mergers.

Dave Tufte said...

Ty: 50/50

So ... I don't remotely specialize in mergers and acquisitions within any field I cover at SUU.

But, to me, this seems like a really basic idea that I've never heard discussed or even considered.

I'll suggest that if you were ever thinking about getting a Ph.D., or trying to put together a publishable paper for some purpose of your own, that this would be one with readily available data, a testable hypothesis, and a decent common sense conclusion.

Or maybe I just don't know this literature very well. It's worth a look.