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Do Mergers and Acquisitions Create Value for Acquiring Firms? Evidence From the UK

Do Mergers and Acquisitions Create Value for Acquiring Firms? Evidence From the UK

1. Introduction

This essay is organized as follows: the first section after this introduction is the literature review that reviews the theoretical and empirical literature on value creation in mergers and acquisitions. Then, the methodology used in this research is presented and this is followed by the results. Lastly, a discussion section will critically evaluate the contribution of this research in the existing body of knowledge in relation to value creation in mergers and acquisitions.

In addition, for those firms looking to expand or restructure their business in the UK, the conclusions of this research may shed some light on the big question of whether and how much commercial and financial benefits such a merger or acquisition will bring about in reality to their stakeholders. On an overall basis, the findings of this study may help to build a better and healthy business environment in the UK where not only the shareholders’ wealth will be closely monitored and maximized, but also the company and management vision and mission will be achieved through successful and effective use of mergers and acquisitions strategies.

On the other hand, this study will provide insights to companies or policymakers who are managing growth, acquisition, risks, and making strategic decisions in the future, especially in the UK. Also, the insights that will be obtained as a result of this study may help corporate managers in the UK to better understand and foresee potential risks during the post-acquisition period. The findings of this study may also advise managerial practices in the UK so as to facilitate and carry out a successful post-acquisition integration effort and improve overall performance.

Also, not only do different researchers apply the term value creation differently, but they also use various performance measures to test whether value has been created through mergers and acquisitions. For example, while most of the scholars prefer to use stock market-based measures as in Bris, Brooks, and Koskinen (2012), other scholars also apply accounting-based measures like cash flow returns or accounting profitability as in Smith and Parrino (2007). This study takes such a discrepancy into consideration and employs a number of different performance measures in order to establish whether acquiring firms manage to achieve value by concentrating on the UK market.

Value creation is one of the most important objectives of a firm and its management. Managers are expected to make decisions that will increase the value of their shareholders’ wealth. It has been shown in previous literature that mergers and acquisitions are one main corporate strategies that firms employ in order to achieve value creation (King, 2012). However, whether this is achieved in reality for acquiring firms has been put into doubt by various studies. It has also being questioned by some academics how successfully managers of firms involved in these transactions can manage the potential organizational and managerial challenges created as a result of mergers and acquisitions in order to achieve the expected synergies that will lead to value creation (Cartwright, 2005).

Mergers and acquisitions have become a popular way of restructuring and expanding companies in today’s competitive business environment. Albeit a large body of research on mergers and acquisitions, the fundamental question of whether these transactions create value for the acquiring firms still remains unanswered (Bris, Brooks, & Koskinen, 2012). This question is important both in academic research and for managers making the decision of whether to pursue a merger or an acquisition. This study seeks to answer this question by focusing on the case of the UK.

1.1. Background

The research study titled “Do Mergers and Acquisitions Create Value for Acquiring Firms? Evidence From the UK” aims to examine the impact of mergers and acquisitions on the value creation of acquiring firms in the United Kingdom. This part of the research is important because the UK experienced a large volume of mergers and acquisitions in recent years. For example, the first half of 2019 saw the value of merger and acquisition agreements in the UK reaching 40.4 billion US dollars. Also, 345 mergers and acquisitions transactions involving UK firms were reported in the first half of 2019. This indicates the importance of understanding the impacts of mergers and acquisitions, which include the possibility of a reduction in competition and choice of suppliers, changes in employment levels and working conditions, and potential for the growth of large businesses and increasing their relative strength. Also, mergers and acquisitions in the UK are regulated by the Competition and Markets Authority (CMA) to ensure that these activities do not restrict competition. It is important to note that mergers and acquisitions do not always lead to value creation for acquiring firms. In some cases, they may end up destroying shareholder value. Hence, it is important to assess the potential benefits and knowledge that acquiring firms get from such transactions. Also, challenges in executing successful mergers and acquisitions include inaccurate valuations, differing corporate cultures, and the overestimation of synergies. This study aims to provide insights into how mergers and acquisitions impact the overall financial performance and the value of acquiring firms in the UK. Such insights could help not only company management and their investors but also regulatory authorities who formulate policies to oversee and regulate mergers and acquisitions activities.

1.2. Research Objectives

By and large, according to the current knowledge, mergers and acquisitions could result in different performance of the acquiring firms and these performance may be affected by lots of complex and interrelating factors. Therefore, apart from only investigating the financial measures, the incorporation of non-financial analysis is also recommended in order to generate a more conducive analysis result which may provide a better strategic insight for the firms that consider growth through mergers and acquisitions.

Last but not least, I would like to consider how the different market and industry conditions may affect the outcomes of the mergers and acquisitions. This is a relatively new area which does not involve too much literature. However, the existing studies and also my own thinking suggest that the different market and industry conditions may lead to different consequences of the mergers and acquisitions. It is because if the market is mature and stagnant, the firms within this industry may have less space for growth through internal expansion and development. As a result, the acquiring firms may seek external expansion from mergers and acquisitions. However, if the acquiring firm expands the business by entering into a new market or even a different industry, it will be more complex and risky because of the less industry knowledge and experiences. On the other hand, if the market is fast-growing and dynamic, the successful factors for internal growth such as innovation and strategic marketing planning may also be the determinants for the success of the mergers and acquisitions. This matter will be considered in the second objective with the usage of non-financial analysis.

The second objective is to investigate the non-financial benefits of mergers and acquisitions. It is because there are lots of case studies shown that mergers and acquisitions result in different failures like the culture clashes which caused the staff turnover, or the innovation of the acquiring firm decreased after the mergers and acquisitions. These kinds of problems will finally lead to the loss of customers and also the loss of efficiency. However, different case studies might reveal different non-financial problems. Thus, a wide range of tangible and intangible non-financial performance measures should be used for the investigation.

The first objective is to identify the impact of mergers and acquisitions on the financial performance of the acquiring firms. I would like to use different performance measures, such as accounting-based measures and stock market-based measures, to find a comprehensive understanding of the financial changes before and after the mergers and acquisitions from different aspects.

1.3. Research Questions

There are two research questions employed as the foundation of this study. Firstly, what is the impact of mergers and acquisitions on the value creation of acquiring firms in the UK? Secondly, what are the main drivers of value creation in mergers and acquisitions for acquiring firms? This section sets out the basic research questions for this study. Given that the aims of mergers and acquisitions are varied, it is a broad area that can be explored from the perspective of both the acquiring and acquired firms. However, this study will focus on the impact on the value creation of acquiring firms in the UK, as the financial performance of acquiring firms can be easily tracked over time, so as to provide empirical evidence to support or to disprove the theory. On the other hand, the evaluation of the drivers of value creation in mergers and acquisitions for acquiring firms will be conducted. It is assumed that in the theoretical framework for value creation, the most important step involves identifying the potential value to be generated through the combination process and developing an implementation plan by which that value can be realized. However, the reality can be diverse and there may be various factors that affect the success of generating value in practice. Therefore, the second question will invite the researcher to draw on relevant empirical evidence in the literature in order to investigate what may cause the divergence between the potential value and the realized value in practice. By addressing these research questions, the researcher aims to provide fresh insights for both the academic field and practitioners in corporate strategy. Secondly, it serves as guidance for practitioners in different industries who are seeking to expand their businesses through mergers and acquisitions. Thirdly, as the study will examine the value creation in the context of the UK acquiring firms, the findings of the study would be meaningful to regulators and policymakers in the UK. This could potentially help the government in proposing appropriate measures in the legislative process concerning mergers and acquisitions, as well as influence the formation of the general guidance for the good practice of mergers and acquisitions in the UK. This section gives a detailed plan of the structure of the whole dissertation. First, it sets out the research questions that will be addressed by this study. Then it explains the reasons for choosing this topic and how it coincides with the personal aspirations and career development of the researcher. Next, the focus of the study will be examined. Also, it helps to demonstrate the rationale of choosing this topic. Finally, it highlights the expected contributions of this research to both the academic field and the practitioners. By following through the steps outlined in this section, the reader will be able to gain an in-depth understanding of the whole research.

2. Literature Review

2.1. Definition of Mergers and Acquisitions

2.2. Theoretical Framework

2.3. Previous Studies on Value Creation

3. Methodology

3.1. Research Design

3.2. Data Collection

3.3. Data Analysis

4. Findings

4.1. Overall Impact of Mergers and Acquisitions

4.2. Financial Performance of Acquiring Firms

4.3. Non-Financial Benefits of Mergers and Acquisitions

5. Discussion

5.1. Comparison with Previous Studies

5.2. Factors Influencing Value Creation

5.3. Implications for Acquiring Firms

6. Conclusion

6.1. Summary of Findings

6.2. Contributions to the Field

6.3. Recommendations for Future Research


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