How to create shareholder value through acquisitions

It is self-evident that through the implementation of a strategy of mergers and acquisitions, the value of the shareholder’s share increases, since it reflects a higher monetary valuation.

The company’s capital base is expanded and its value is enhanced by the acquisition of more operational facilities.

In essence, the main advantage associated to shareholders’ value is the creation of the necessary conditions for the development of synergies between the newly formed group of companies.

According to Ansoff, this is due to the fact that, in synergies caused by mergers or acquisitions, the sum of the combined forces of two or more companies, represents a greater number, than the pure mathematical number which is the result of the summation.

Therefore, in the case of synergies, “2+2=5”, which shows the magnifying effect of synergy, in terms of the integrated power of a group of companies.

Therefore, the possibility for a company to achieve greater profits, even in a more efficient way, is increased, resulting in an increase of the company’s market value, which is translated into higher value for the shareholders.

Besides, higher profits mean higher dividends, increasing shareholders’ value again.

The biggest advantage of a merger or an acquisition, which may motivate investors to become shareholders in the new business entity, is the perspective of future growth.

In fact, a company’s future growth and development is of primary importance to both its management and shareholders, since a) any business entity should be considered as a going concern, not exhausted in short term goals, but expanded towards a more long term horizon and b) because, regardless of short term stock market movements, which may be at certain occasions the product of a “bubble” or price manipulation by speculators, adherence to the calculation and evaluation of a share’s intrinsic value can provide the right sort of information to investors and prospective shareholders.

It is understood that the shareholders’ value, derived from a specific merger or acquisition should always be considered upon a medium to long-term basis.

Of course, it is not unusual and, in fact, there is nothing to prohibit a business formation which is the result of a merger, to show short-term or even immediate profits.

However, an existing or future shareholder should be cautious and assess the option to invest in a company’s share, in terms of the estimation of that company’s ability to develop and expand operations in the long term, producing, therefore, more constant profits.

This article was originally published by me on Medium.com
You can read it here.