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Chapter 4: Do Mergers and Acquisitions C... > The Economic Rationale of Mergers an...

The Economic Rationale of Mergers and Acquisitions

A few months ago, I appeared on CNBC’s Closing Bell with Maria Bartiromo to discuss my research on executive turnover following mergers and acquisitions (M&As). Robert Profusek, who directs the M&A practice at Jones Day, a New York-based legal firm that advises firms on corporate governance issues, was asked to comment on one of my articles, which had recently been published in Journal of Business Strategy.1 Profusek disagreed with a statement I made in the article: that a large portion of M&As fail. He asserted that many M&As are driven by synergistic motives. Therefore, executive turnover is often a necessary and desirable outcome of M&As.

Profusek did have a good point. I agreed that some mergers do indeed result in top management team redundancies such as overlapping functional management skills. In these cases, efficiencies can sometimes be achieved by eliminating redundant positions. Research on M&As, however, shows that a majority of target companies are good performers, not poorly performing firms that need to be acquired in order to rid them of incompetent management.2 Exactly the opposite is true. Most acquiring firms are attracted to companies that have something of value—technology, marketing know-how, access to distribution channels, among many other factors—on which the acquiring company would like to get its hands.


  

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