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It is found in literature that Mergers and acquisitions are the most popular corporate growth strategy among firms and wish to establish a competitive advantage over their rivals. There have been five major waves of mergers activity, five periods of high merger activity often called merger waves which have taken place in the history of the United States.(Rudolph 2000, Gaughan 2002) These waves are associated with technological, economic and regulatory shocks in industries. In the last seven year, it is found that during fifth merger wave the value of acquisition has increased dramatically. M & A is way to fulfill various corporate goals.
During my literature review, It is found that Mergers and acquisition process is slightly differently given by various authors. According Picot 2002, a typical Mergers and acquisition transaction goes under three phases, which mentioned as under:
There is another view which is called the theory of financial turbulences, it is model of merger waves presented by Grot in year 1969, he described that when merger wave produce in reaction it create general financial activity, due to this result there would be an imbalance in market place products. (International research Journal of Finance & Economics 2006) This model of Grot has been designed and developed in influence of merger waves which produced during the period of strong financial growth and increase of stock market in USA, Britain and European Union. In this theory author presented that merger wave can create imbalance in market financial system.
It is described by Porter in 1987 and Young in 1981, acquisition have a high failure rate nearly half of all acquisitions are rated as being unsatisfactory.
In the research report of Ravenscraft and Scherar 1989, They found in their study that profitability of target firms on an average, actually it declines after an acquisition, both suggesting that implementation difficulties probably play a critical role in determining the eventual performance of an acquisition. McManus and Hergert (1988) reported that in the initial twelve 12 months, a merger or acquisition companies most probably faces a loss in market value of 1-10 percent. British Institute of Management (1986) identified 16 factors which are associated with unsuccessful mergers and acquisition, about half of directly related to people and issues of people management, e.g. difficulties of merging two cultures, problems of skill transfer, Demotivation of employees of merged company etc. (Amy L. Pablo, Mansour Javidan "Mergers and acquisitions")
While, Morck Shleifer and Vishny (1988 and 2001) described that the market have power to punish shareholders in companies that busy in unrelated acquisitions where as shareholders who made related acquisitions, felt more better. ( Patrick A. Gaughan, Mergers, Acquisitions And Corporate Restructurings)
In the strategic management school of thought, mostly researchers using either accounting based or stock market based measures which produced various studies relating acquisition performance to acquisition motives and strategies (e.g. Lubatkin 1983, Kusewitt 1985, Shelton 1988)
In The Synergy Trap, Sirower (1997) : Mark L Sirower destroys famous notion that the acquisition premium represents potential value.
He further described that if the NPV (Net Present Value) of the realized synergies from a merger more than pay for the premium paid will a merger be financially successful. There is necessary to describe synergy, it is often associated with physical science rather than finance or economics. It refers to type of reactions which occur when two factors combine to produce grater effect. There is a key synergy element in synergy definition and measurement is establishment of an appropriate base line. Proper base lining helps to avoid many common problems e.g. Job vacancies eliminate from one department and create or transfer to other department; it shows more expensive in multiple aspects.
Synergies are the present value of the net additional cash flow that is generated by a combination of two companies. ( Source Synergies: The Art and Science of Making 2+2=5 by Bill Pursche)
Sirower explain how companies often pay too much and predictability never realizes the promises of increased performance competitiveness, in their search they have only motive to acquire other companies. Sirower gives analysis of fundamentals behind merger and acquisition performance, observing sharply through the existing beliefs about failure of all around acquisitions, e.g. lack of strategic fit, corporate culture problems. Through this observation manager will be enabling to avoid losses in a decision of acquisitions. Sirower further reveals that it is unique business of gamble that acquisition represents the managerial challenges which already deep fixed in current stock prices. The synergy trap is first expose and proves that tendency of managers to produce philosophy in acquisitions often leads to disastrous end of their shareholders.
Finally, Sirower gives advice that companies must plan very carefully to avoid huge uncertainties, before deciding to enter the acquisition game.
In The Synergy Trap, Sirower (1997) described that only if the NPV of the reali