Merger and Acquisitions

Merger and Acquisitions

Companies merge and acquire other companies for various strategic reasons with various degrees of success. The success of a merger is measured by whether the value of the acquiring firm is enhanced by it. The practical aspects of mergers often prevent the forecasted benefits from being fully realized and the expected synergy may fall short of expectations. This paper discusses three examples of recent mergers, the forces that drive companies to buy or merge with others, and the financial outcomes of each case.

In May, 1998, Daimler-Benz and Chrysler Corporation, two of the world's leading car manufacturers, agreed to combine their businesses in what they claimed to be a "merger of equals." The merger resulted in a large automobile company, ranked third in the world in terms of revenues, market capitalization and earnings, and fifth in the number of units (passenger-cars and commercial vehicles combined) sold (Gaughan, 2004). The strategy going into that merger was to allow both groups to maintain their existing cultures. The former Chrysler group was given autonomy to manufacture mass-market cars and trucks, while the Germans continued to build luxury Mercedes. In this case, the merger would offer new products, countries, segments, brands, or skills, will add much more to your business than someone who does the same thing you do (Gaughan, 2004). Despite significant short and medium term expected synergies, DaimlerChrysler has only been posting low or negative profits after the deal. The $5.8 billion loss in 2001 was the biggest in German business history. Last year, the combined market value of the merged entity had fallen to about half the value of their separate valuations in 1998. Rivals such as BMW, Renault and Nissan, on the other hand, managed to improve in 2004 despite the same challenging environment (Mermigas, 2002). But the DaimlerChrysler merger has been a financial black hole for the company; its market value has tumbled 40 percent from $84 billion to $47 billion since the merger and is far from fulfilling Daimler’s prediction that the merged entity would become the world's most profitable automaker (Landler, 2005).

AOL's $165bn acquisition of Time Warner was structured to turn the once-independent internet medium into a cornerstone of the mainstream media system, validating the Internet’s role as a leader in the new world economy, while redefining what the next generation of digital-based leaders will look like( Mermigas, 2002). The deal, announced in 2000, employed an unusual merger structure in which each original company merged into a newly created entity "AOL Time Warner”. Time Warner provided roughly 70 percent of the combined company’s profit stream while AOL controlled a greater stake of its stock because of how highly Wall Street values the growth potential of the Internet (Sutel, 2003). The deal, announced in 2000, employed an unusual merger structure in which each original company merged into a newly created entity "AOL Time Warner". After the merger, the profitability of the AOL internet service provider (ISP) division decreased while the market valuation of similar independent internet companies fell dramatically. As a result, the value of the America Online division dropped significantly causing AOL Time Warner to report a loss of 99 billion dollars in 2002--at the time, the largest loss ever reported by a company. In response to the huge loss in 2002, the company dropped the "AOL" from its name (Sutel, 2003).

Pfizer purchased Warner-Lambert for $70 billion in what was described in the pharmaceutical industry a well received hostile takeover. The merger represents a superb strategic fit, and provides Pfizer’s incredible sales and marketing infrastructure with a great R&D pipeline (Pfizer, 2003). One of the biggest drivers of the Pfizer merger with Warner-Lambert was Lipitor, Warner-Lambert’s