Summarize the disadvantages of mergers and acquisitions as a means of diversification.

Question

What will be an ideal response?

Answer 1

There are many potential downsides associated with mergers and acquisitions. Among these are the expensive and excessive premiums that are frequently paid to acquire a business; premiums of 20, 30, or even 80 percent are not uncommon, and the acquiring firm must create enough value to recoup the investment. Although synergies and economies of scale, which should result in increased sales and market gains, may, indeed, materialize, the performance hurdle has already been set quite high. Other difficulties relate to integrating the activities and resources of the acquired firm into the corporation's own operations as well as identifying "synergies" that are quickly imitated by the competition. Moreover, managers' egos and credibility can sometimes get in the way of sound business decisions. Size is not always important for the success of a business, but senior managers may be preoccupied with the personal prestige of leading the largest firm in their industry, even if that means paying excessive amounts of money to accumulate enough entities to become the biggest player. At other times, if the acquisition does not perform as planned, managers who pushed for the deal find their reputations at stake. To protect their credibility, and against better business judgment, these managers might funnel more resources and escalate their commitment toward an inevitably doomed venture. Finally, there are many cultural issues that may bring calamity to a well-intended M&A endeavour.