Merger and acquistion in Vietnam securities sector identify motives nennefits and obstacles Luận văn thạc sĩ

MINISTRY OF EDUCATION AND TRAINING
UNIVERSITY OF ECONOMICS HO CHI MINH CITY







By
TRUONG NU PHUONG LOAN


MERGER AND ACQUISITION IN
VIETNAM SECURITIES SECTOR
IDENTIFY MOTIVES, BENEFITS AND OBSTACLES


Ology: Finance – Banking
Ology code: 60.31.12
MASTER’S THESIS

Advisor
PhD. Nguyen Thu Hien




HO CHI MINH CITY 2010
ACKNOWLEDGEMENTS

First of all, I would like to express my deepest gratitude and sincere thanks to Dr
Nguyen Thu Hien, my thesis advisor, for her valuable advises and support
throughout every stage of my study.
Secondly, I am also grateful for the suggestions and comments from my friends,
colleagues, relatives during the time of study.
Thirdly, I would like to extend deep senses of gratitude to all of my teachers who
have taught and guided me throughout the period of MBA Program at University
of Economics Ho Chi Minh City .
Fourthly, I would like to thank my family for the constant encouragement and
moral support given to me throughout my studies.
Lastly, this study paper is the meaningful gift to my mother who always expects
me to progress in the life.


Ho Chi Minh City, Vietnam
October, 2010

Truong Nu Phuong Loan


ABSTRACT
M&A activity is still rather new to the Vietnam’s economy. Together with the
stock market, M&A has just appeared and been developing for 10 years in
Vietnam. Although, it has not had a long development history, the M&A activity
has obtained certain critical development milestones as there have been more and
more companies choosing M&A as a way to expand business, and achieve
objectives of business growth as well. This researching topic aims at exploring
and discovering the motives, potential benefits, and obstacles of the M&A
activities of the companies in the securities sector in Vietnam.
In order to achieve the set targets of the research, it was started by studying

relevant basic theories of the international researchers on the motives, potential
benefits and obstacles of the M&A activity.
Researching method used was namely the qualitative and quantitative approach.
The data of the quantitative method was done by researching 32 securities
companies in Ho Chi Minh City
The results of relevant tests showed that the companies paid more attentions to
the motives of improving operation management, market penetration, penetration
into new market, as well as efficiency factor.
The results of relevant test also showed that the most critical obstacle to which
the companies of the securities sector in Vietnam did face with were those of
regulatory and administrative procedures.


TABLE OF CONTENTS
ACKNOWLEDGEMENTS i
ABSTRACT ii
TABLE OF CONTENTS iii
LIST OF FIGURES vii
LIST OF TABLES vii
LIST OF ABBREVIATIONS xi
CHAPTER I : INTRODUCTION 1
1.1 General background 1
1.2 Research objective 4
1.3 Scope of study 5
.CHAPTER II: LITERATURE REVIEW 6
2.1 General views 6
2.2 Characteristics of Merger and Acquisition waves in the USA 7
2.3 Research theories on merger motives 10
2.4 Concept of Synergy as a Main Motive for M&A 12
2.5 Obstacles preventing M&A activities 17

2.6 Vietnam M&A activity review – 2009 19
2.7 M&A in Vietnam securities sector in indispensable 22
CHAPTER III : RESEARCH METHODOLOGY 28
3.1 Research model 28
3.2 First phase – Qualitative research 29
3.2.1 Interview 29
3.2.2 Build questionnaire 29
3.2.3 Pilot testing 30
3.3 Second phase – Quantitative research 31
CHAPTER IV: RESULT 32
4.1 Sample profile 32
4.2 Results of qualitative research step 33
4.3 Group of factors 34
4.3.1 Measurements scales of variables “Motives, benefits of
M&A in Vietnam securities sector” 34

4.3.2 Measurements scales of variables “Obstacles of
M&A in Vietnam securities sector” 35

4.4 Exploratory Factor Analysis 37
4.4.1 Measurement scales of “Motives, benefits of
M&A in Vietnam securities sector” 38
4.4.2 Measurement scales of “Obstacles of
M&A in Vietnam securities sector” 41
4.5 Reliability analysis 43
4.5.1 Measurement scales of “Motives, benefits of
M&A in Vietnam securities sector “ 44
4.5.2 Measurement scales of “Obstacles of
M&A in Vietnam securities sector” 50
4.6 Observing variances and Cronbach’s Alpha after

reliability analysis 54
4.6.1 Result of Cronbach’s Alpha for factor of “Motive, benefits
of M&A activity” 54
4.6.2 Result of Cronbach’s Alpha for factor of “ Obstacles of
M&A activity” 57
4.7 Descriptive statistic of motives, benefits and obstacles
of M&A activity 60
4.7.1 Number of years experience factor 61
4.7.2 Chartered capital factor 62
4.7.3 Profit before tax factor 66
4.7.4 M&A dynamic factor 67
CHAPTER V : CONCLUSIONS 73
5.1 Summary of findings 73
5.1.1 Motives and benefits of M&A after analyzing the factors
and measuring the reliability of the scales 74
5.1.2 Exploration of obstacles of M&A after analyzing the factors
and measuring the reliability of the scales 75
5.1.3 Result of Descriptive statistics and ANOVA test on
classification variables 76
5.2 Limitation of research 77
5.3 Recommendations 78
REFERENCES 79
APPENDICES Error! Bookmark not defined
APPENDIX 1: SURVEY QUESTIONNAIRE – ENGLISH 81
APPENDIX 2: SURVEY QUESTIONNAIRE – VIETNAMESE 88
APPENDIX 3: LIST OF M&A DEALS FOR SURVEY 95
APPENDIX 4: LIST OF INTERVIEWEES 102

LIST OF FIGURES
Figure 2.1: Vietnam Deal Activity 2008-2009 by quarter. 20
Figure 2.2: M&A target in Vietnam Percentage of announced deals
by the top five most active industry sectors 21
Figure 2.3: M&A deals in Vietnam securities sector from 2007
to now 25
Figure 3.1: Research model 28
Figure 3.2: Qualitative research 31

LIST OF TABLES
Table 1.1: Announced M&A deals 2
Table 2.1: Common Theories of What Causes Mergers
and Acquisitions 14
Table 2.2: Commonly Citied Reasons for M&A Failure 17
Table 2.3: Deal Activity Summary 20
Table 2.4: M&A deals in Vietnam securities sector 24
Table 4.1: Characteristic of samples 32
Table 4.2: Descriptive Statistics in Motives, and Benefits 36
Table 4.3: Descriptive Statistics in Obstacles 37
Table 4.4: KMO and Bartlett’s test with scales of “ Motives,
benefits of M&A in Vietnam securities sector 38
Table 4.5: Extracting Component Analysis with Varimax rotation with
scale of “Motives, benefits of M&A activities in securities sector” 39
Table 4.6: KMO and Bartlett’s test with scales of “ Obstacles of M&A
in Vietnam securities sector. 41
Table 4.7: Extracting Component Analysis with Varimax rotation
with scale of “ Obstacles of M&A activities in securities sector” 41
Tables 4.8: Results of Reliability analysis on Cronbach’s Alpha
Coefficient of :FM _1” 44

Table 4.9: Results of Reliability analysis on Cronbach’s Alpha
Coefficient of :FM _2” 45
Table 4.10: Results of Reliability analysis on Cronbach’s Alpha
Coefficient of :FM _3” 45
Table 4.11: Results of Reliability analysis on Cronbach’s Alpha
Coefficient of :FM _4” 46
Table 4.12: Results of Reliability analysis on Cronbach’s Alpha
Coefficient of :FM _5” 46
Table 4.13: Results of Reliability analysis on Cronbach’s Alpha
Coefficient of :FM _6” 46
Table 4.14: Results of Reliability analysis on Cronbach’s Alpha
Coefficient of :FM _7” 47
Table 4.15: Results of Reliability analysis on Cronbach’s Alpha
Coefficient of :FM _8” 48
Table 4.16: Results of Reliability analysis on Cronbach’s Alpha
Coefficient of :FM _9” 49
Table 4.17: Results of Reliability analysis on Cronbach’s Alpha
Coefficient of :FO _1” 50
Table 4.18: Results of Reliability analysis on Cronbach’s Alpha
Coefficient of :FO _2” 51
Table 4.19: Results of Reliability analysis on Cronbach’s Alpha
Coefficient of :FO _3” 52
Table 4.20: Results of Reliability analysis on Cronbach’s Alpha
Coefficient of :FO _4” 52
Table 4.21: Results of Reliability analysis on Cronbach’s Alpha
Coefficient of :FO _5” 53
Tables 4.22: Results of Cronbach Alpha’s for factor of “ Motives,
Benefits of M&A activity ” 56
Tables 4.23: Descriptive statistic of “ Motives and Benefits of
M&A activity” 57

Tables 4.24: Results of Cronbach Alpha’s for factor of “ Obstacles
of M&A activity” 59
Tables 4.25: Descriptive statistic of “ Obstacles of M&A activity” 60









LIST OF ABBREVIATIONS

1. ANOVA : Analysis of Variance
2. EFA : Exploratory Factor Analysis
3. KMO : Kaiser - Meyer - Olkin Measure of Sampling Adequacy
4. M&A : Merger and Acquisition
5. SPSS : Statistical Package for the Social Sciences
6. U.S : United States
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CHAPTER I: INTRODUCTION
1.1 General background
In January 2010, Vietnam concluded three years of membership in the World Trade
Organization. Membership infused a new spirit into the business environment in the
country and also facilitated higher visibility for Vietnam as an international trading
partner and as an investment destination. Membership status has also motivated
Vietnamese enterprises to evolve and to adopt international best practices in order to
maintain their rate of development and their competitiveness against current and
future entrants of foreign competitors.

To raise funds for the economy to facilitate economic growth, Vietnamese
government has issued many policies attracting foreign investment. Government
decree 139, which became effective on 1 January 2008, removed limit on foreign
ownership ratios in Vietnamese companies except in relation to public listed
companies where the 49% cap remained in place along with a 40% cap in public
non-listed companies. In addition, sector specific limitations, most importantly in
telecoms, financial services and other services remained in place. Besides, the
development of stock market in Vietnam also attracts funds from local investors,
who used to choose gold, foreign currencies and real estates to be only choices
before the introduction of stock market.
Interest in Merger and Acquisition has remained extremely high in Vietnam during
2008. Successful domestic companies have been increasing open to deal making as
they pursue expansionist strategies, while companies struggling to cope with the
changing economic environment were more open to discussion regarding the scale
of equity stakes to domestic and foreign suitors. The number of deals between
Vietnamese companies doubled in comparison to 2007.

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Table 1.1 Announced M&A deals
Announced M&A deals – Target region/ Nation

2008 2007 % change

2008 2007
%
change

US $ Million Number of deals
Worldwide 2.395.960

4.169.287

-29.6

39.597

43.817

-9,6

USA 986.283

1.570.848

-37.2

9.165

11.296

-18.9

China 104.253

75.390

38.3

2.983

2.587

15.3

South East Asia 75.176

75.675

-0.7%

2.065

2.001

3.2

Vietnam 1.009

1.719

-41.3%

146

108

35.2

Source: Thomson Reuters, Pricewaterhouse Coppers Research.

Financial services are a strong case for Mergers and Acquisitions, especially in
securities sector. The explosion in the number of securities companies over the past
10 years creates an intensely competitive market place for the small players in a
country where number of investors is still limited. In addition, the impact of global
financial crisis on Vietnamese stock market has cold the market down sharply. This
lead to a drop of VNI from 1103.88 points to 315.62 at the end of 2008 .Trading
volume also reduced sharply during this period from 1.239.692.000.000 VND dong
to 406.560.000.000 VND dong. The reduction of trading activities has brought loss
to many securities companies and some of them have to either cut down their
services and lay off staffs, or find ways to merge with other companies to survive.
There are over 100 securities companies in Vietnam market where of individual
brokerage clients is still limited, where few new listing of companies are taking
place so that the investments are unattractive. Many newly established securities
firms and even some of the well established ones with relatively large brokerage
bases, are looking for a strong financial institution to take a minority stake in them
in order to gain access the investor’s expertise, offshore client base and their
funding resources. Foreign investors for their part still see Vietnam as an attractive,
developing market but in general are moving cautiously and will not willing to pay
the sorts of multiples seen in past securities company Merger and Acquisition
transactions.
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In addition, the State Securities Commission has decided to stop granting license for
the establishment of securities companies because of the quantity inconsistent with
quality. Thus, the investors continue to “hunt”. Because they believe that the
Vietnam securities market is a new market for investment. Specifically, the
transaction fees in Vietnam securities companies are higher than developed
countries. With the technology available these organization will participate in the
exploitation of Vietnam’s securities market better.
From 2005 to present, the Mergers and Acquisitions in Vietnam securities section
trend to increase both the quantity and value of transaction, with participation from

abroad organization .In fact, many securities companies have transferred successful,
for example: Morgan Stanley has bought stake of Huong Viet Securities Company
and renamed to Morgan Stanley Gateway Securities JSC, Golden Bridge has bought
49 percent stake of Click &Phone Securities company, RHB Bank (Malaysia) has
bought 49 percent stake of Vietnam Securities company. OSK investment bank
BHD, a wholly-owned unit of OSK Holding Bhd, withdrew its agreement to acquire
a 49% stake in Seabank Securities JSC, a securities brokerage firm, for 220.5 billion
Vietnamese dong.
Latest business, A purchase by Woori Investment and Securities Company (Korea)
of 10 percent of the Bien Viet Securities J.S.C(CBT) ‘s charter capital. Not only
foreign partner but also domestic investors or large corporations are interested in
this field. Specifically, in July 2009, the PetroVietNam insurance corporation’s
acquisition of 19 million stake equivalent to 66.58 percent of charter capital in the
PSI securities company. Seamico Securities PCL (SS) acquired a 25% stake in
Thanh Cong Securities JSC(TC), a securities brokerage firm, and a majority-owned
unit of Thanh Cong Textile Garment Investment Trading JSC, for 77.683 billion
Vietnamese dong. Concurrently, SS was granted an option to raise its stake to 49%
from 25%, by acquiring a further 24% stake in TC. Vietnam State owned Tan Binh
Import-Export Corp acquired a 10% stake in Cholon Securities JSC, from Cholon
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Investment and Import-Export Co (7.2%) and Cholimex Food JSC (2.8%). In March
2009, the Vietnamese government (VG), announced that it was seeking a buyer for
its 13% stake in its Vietinbank Securities Co (VS) unit. Concurrently, VG planned
to divest its 14.9% stake in VS to the public in an equity carveout transaction.
Ocean group acquired a 59% interest, or 8.9 million ordinary shares, in Ocean
Securities Joint Stock Company.
In addition, the private investors are interested in this field. Mr Tran Minh Tien
acquired a 42.86% stake in Royal Securities Corp, a securities brokerage firm, Mr
Trinh Van Tuan acquired a 16.92% stake in VietNam International Securities JSC, a
securities brokerage firm, from Ms Nguyen Thi Thu Trang.

The above analysis shows that the takeover market in Vietnam has been very active
recently and will be very potential in the future, especially for the securities sector.
Therefore, this thesis focuses on identifying the motives, benefits and obstacles of
mergers and acquisition activities going on in the securities sector of Vietnam with
a purpose to find out the factors behind the growing trend of M&A in securities
sector and provide recommendations to the policy makers to encourage the
development of this important sector of the economy
1.2 Research objective
The objective of this thesis is to identify motives that foster Vietnamese securities
companies to do merger and acquisition, potential benefits of Merger and
Acquisition, and also obstacles preventing securities companies in doing Merger
and Acquisition successfully. Specifically, it attempts to investigate the following
questions:
1. What are motives that foster local firm to do Merger and Acquisition?
2. What are potential benefits that enable merged firms to be more advantage?
3. What are obstacles that have been preventing securities companies in doing
merger and acquisition successfully?
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1.3 Scope of study
Due to the complication of Merger and Acquisition activities, time constraint as
well as the limitation of Merger and Acquisition information, this study only
focuses on M&A transactions involving listed companies that are located in Ho Chi
Minh City.
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CHAPTER II: LITERATURE REVIEW
2.1 General views
Merger and acquisition activities are nowadays a common phenomenon in many
industries. Numerous M&A deals in diverse industries are reported in press releases
every week. M&A activities change market structures, market share, and the depth

of competition in a market. The amount of money at risk, the volume of the deals
that are closed, and the prevalence of M&A across all industries in almost all
regions in the world, gives M&A its eminent role in business administration theory.
In general, the quest for growth in a company can be realized with either one of the
two growth strategies, namely organic or inorganic growth strategy. Organic growth
strategy, also called “internal growth strategy”, refers to the growth of revenue,
market share, and the size of a company independently without acquiring or
cooperating with another company. Inorganic growth strategy, sometimes called “
external growth strategy”, is the growth of a company through cooperation or
concentration or both. In recent years the management of many companies turns to
external instead of internal growth strategic to demonstrate growth due to time and
resource disadvantages over competitors and ostensible synergies they see between
other companies and their own. External growth strategy can be subdivided into
cooperation and concentration based on the binding intensity between the
companies involved. Binding intensity measure the level at which the resources,
actions, and autonomy of decision of a company are restricted, due to a contractual
arrangement with another company. As shown in Fig. I, there are two types of
concentration – mergers and acquisition. Although the terms “ merger” and “
acquisition “ (M&A) technically have different meanings, they are most often
confused or used as synonyms.
Merger: A combination of two or more companies in which the assets and
liabilities of the selling firm(s) are absorbed by the buying firm. Although the
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buying firm may be a considerably different organization after the merger, it
retains its original identity.
According to Gaughan, a merger is a combination of two companies in which only
one company survives and the merged company ceased to exit, whereby the
acquiring company assumes the assets and liabilities of the merged company.
An acquisition, also known as “takeover”, is the buying of a company the
"target” by another or the purchase of an asset such as a plant or a division of

a company. The premise to M&A is that it is the panacea to fast growth in a
market. It is much easier for companies to generate revenue growth by simply
adding the annual revenues of acquisition targets to theirs than improving the
profitability of an overall enterprise.
2.2 Characteristics of Merger and Acquisition waves in the USA
M&A activity has been being seen for long, starting from the years at the end the
19
th
century. M&A activity was first recorded in the transition period from the
competitive capitalism to the monopoly capitalism with the forming of giant
industrial group of companies in 1895- 1905. This was known as the period of
capital mobilization of the world economy in line with the fast development of
economic powerful countries, such as the U.S, and some European countries.
Mainly driven by the overproduction, which resulted in the weakness of demand
and declining in selling price, many U.S companies conducted the horizontal
mergers in order to create huge production lines. And thus, the M&A was known
since then.
Following the U.S market, the UK market happened to have M&A transactions in
the 60 decade of the 20
th
century. M&A has been also being recorded in other
European markets since the years of 1980. This situation was explained as a result
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of the globalization of the world economy and the impact of the USA economy to
the others’.
Moving into the 21
st
century, a new M&A wave happened with more diversified
forms and bigger size. This wave did not limit within the developed economies, but
also cover the emerging economies, such as Korea, China, Singapore, India,

Vietnam and Middle East region…
As such, with the history of more than 100 years, the characteristics of Merger and
Acquisition waves in the USA are divided into five waves as follows:

1895-1903: The creation of the great oil, steel, and other trusts, sometimes called
the “Merging for monopoly” wave. The First World War was the cause ceasing the
first wave.
1920 -1929 : Consolidation in many industries, sometimes called the “ Merging for
oligopoly” wave.
The second wave began in the late of 1910s and continued until
1929 when the stock market crashed.

1960-1973 : Emergence of conglomerate firms and other diversifying acquisition,
sometimes called the “ Conglomerate merger” wave. This period was witnessing the
birth of groups of companies, and multi-national companies in the world economy.
Many companies of the U.S. started to make investment in other countries to enjoy
the favorable taxation policies, reduction of trade technical barriers and
transportation cost…This wave was stopped in the years of the beginning of the
1970, when there were a decline of Dow Jones index, and energy crisis.
1978- 1989 : The fourth wave isn’t neatly captured in a single phrase, but included
large components of hostile takeovers, bust –up and refocusing of conglomerate
firms, and leveraged buyouts.
Any company might also be acquired if being unable
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to utilize its strength to survive M&A of this period happened between banks,
aviation, oil and gas, and pharmaceutical companies.
1992 – Present: Strategic restructuring wave.
Perhaps comparable takeover booms occurred in other countries at about the same
time ( or at other times), but if so, no scholar has mentioned this, to may knowledge.
Cross- border transactions were a distinct minority. We don’t know what proportion

U.S takeover activity was of the world total during the prior waves- no one kept
good international data. But the failure to collect data is telling – apparently there
wasn’t enough activity to justify collecting it.
In contrast, the current wave has a distinctly international flavor. Many of the
signature transactions – including Daimler’s acquisition of Chrysler to form
DaimlerChrysler and Vodafone’s acquisition of Mannesmann- were either entirely
outside the United Stated or involved a non –U.S party. The $180 billion Vodafone
– Mannesmann transaction, between two non- US firms, is the largest in history.
Autos, telecoms, telecom and internet equipment, airlines, oil, and metals ( notably
copper and aluminum) are example of industries where worldwide consolidation is
driving intensive takeover activity. In banking, the mergers mostly remain
domestic( perhaps because banking is highly regulated), but domestic consolidation
is increasing driven by international competition. European takeover activity, fueled
by the adoption of a true single market with a single currency, has soared to $ 630
billion in announced transactions in 1998 and $ 1.6 trillion
in
1999.It wouldn’t
surprise me if European takeover in dollar volume probably for the first time ever.
Writ broad, the increasingly international flavor of takeovers is an inevitable
accompaniment to the international growth of securities market. The United States
economy is a shrinking portion of the world economy and the U.S stock market, as
strong as it has been, is a shrinking part of the world market, measured by market
capitalization. No surprise, the, that U.S takeover are a shrinking share of the
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worldwide total. The international flavor of merger activity will almost surely be
even more prominent in the next wave, and its predecessor as the last distinctly
American merger wave.
By reviewing the above mentioned six periods of the M&A, it is understood that the
waves of the M&A were all to have certain connection with the development of the
economy, especially when the stock market hit the mark.

2.3 Research theories on merger motives

Although the decision to merge is often driven by a complex pattern of motives that
cannot be put into a single approach, academic research has developed some major
theories that help to explain underlying motives and assumptions. However, a final
answer to the motivations behind the merger has not been found, as it is difficult for
economic researchers to identify the sources of gains with their coarse information
set (Andrade, Mitchell et al.2001). This paper tries to shed additional light on this
topic by suggesting that the influence of industry concentration should be
considered in the academic research of merger motives. In the following, we briefly
introduce the three theories we test and explain how these motives can be identified
by observing capital market reactions of stakeholder firms.
The first theory is the efficiency or synergy theory. It states that mergers are
executed to achieve synergies, compromising financial synergies (lower cost of
capital), operational synergies (combination of operations and knowledge transfer)
and/or managerial synergies (when the acquirer’s management possesses superior
management skills and abilities). In fact, synergies are often cited as a key argument
to improve productive efficiency and to justify management actions (Porter 1987).
Capron (1999) argues that cost synergies are often driven by asset divestitures
(physical assets and cutback of personnel), while revenue- enhancing synergies
emphasize the redeployment of resources to improve the company’s ability to
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generate earning. Empirical research shows that a relationship between the net
present value of synergies and announcement day return exists, although revenue-
enhancing synergies are not valued as highly as cost – reduction synergies
(Comment and Jarrell 1995, Walker 2000, Houston , James et al.2001). Fee and
Thomas (2004) find evidence consistent with improved productive efficiency and

buying power as sources of gains to horizontal mergers. Andrade and Satfford
(2004) highlight that mergers are an effective means for industries with excess

capacity to rationalize and induce exit. To identify a productive efficiency motive in
firm mergers, empirical research suggest examining capital market reactions (Eckbo
1983, Fee and Thomas 2004, Sharur 2005). According to relevant literature on this
topic, the positive impact of synergies and productive efficiency gains is reflected in
positive capital market evaluations for target and acquiring companies following
merger announcements. In contrast, share price reactions of rival companies are not
clearly determinable as both positive and negative excess returns can be argued. For
example, if the merging parties achieve a more efficient production/ market
positioning, then rivals should be worse off as competitive disadvantages result
(Schumann 1993). The opposite effect occurs if the merger induces a positive signal
indicating that the rivals are able to copy the efficiency gain of the merging
companies (e.g better production routines) .
The second theory is the monopolistic collusion theory, which argues that
mergers (horizontal and conglomerate mergers) are executed to improve market
positioning and to gain market power. Trautwein (1990) summarizes that the
monopoly theory’s evidence appears to be weak, as most studies show that the
primary reason for mergers is not to achieve monopoly power. This is confirmed by
recent studies. For example, Fee and Thomas (2004) found in their investigation of
upstream and downstream product- market effects only little evidence for
monopolistic collusion. Evidence on the monopoly consequences of mergers can be
identified by observing target, acquirer and rival reactions. As an improvement of
market positioning is achieved, there should be a positive wealth gain to target and
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acquirer shareholders. Competitors should also benefit through collusive mergers
since the positioning of all companies in the industry is improved. This is because
collusion mergers have a tendency to limit output, raise product prices and/ or lower
factor prices (Chatterjee 1986). However, a positive riva. Reaction in itself cannot
definitively prove monopolistic collusion motives (Stillmann 1983, Eckbo and Wier
1985).

The third line of reasoning focuses on the explanation for why mergers often
destroy wealth of bidding shareholders. It includes the agency theory (managers
who maximize their own utility) and hubris theory (overestimation of
management’s abilities). Empirical studies show that at least part of the large price
increases in the target firm shares are attributed to a general wealth transfer from
bidder to target. Roll (1986) argues that hubris is necessary to explain why mangers
do not abandon unfavorable takeover offers, also since reflection would suggest that
such bids are likely to represent positive errors in valuation. Seyhun (1990) finds
that mergers are value destroying for acquiring firms and conclude that takeovers
are motivated by agency problems or hubris. Walking and Long (1984) find that the
existence or absence of managerial resistance to a takeover bid is directly related to
the target management’s personal wealth changes induced by takeovers.
2.4 Concept of Synergy as a Main Motive for M&A
The main motive behind each and every M&A deal that is consummated is based on
the concept of synergy. Synergy, therefore can be seen as the lynchpin of every
M&A deal. Synergy can be defined as the combination of two elements, A and B, to
produce a greater result or where the sum of the results of the single elements A and
B is far smaller than that of the whole A+B together- the well-know 1+1= 3 effect.
It infers that M&A generates greater value for shareholders by capitalizing on
foreseeable synergetic benefits between two companies. In general, there are two
main forms of synergy: operating and financial synergy. Operating synergy can
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furthermore be divided into revenue- enhancing and cost- reducing synergies.
Revenue- enhancing synergies refer to the opportunity to increase total sales
significantly by cross-selling of products, and having access to an already installed
customer base along with restricted distribution channels. Cost-reducing synergies
stem from economies of scale and scope effects that the organization then has. The
economies of scale effect describes the decrease in cost per unit due to a significant
increase in total output. For example, underutilized production plants can be used at
full capacity and the fixed cost per unit will drop because the total fix cost will now

be spread over many units. In contrast, economies of scope is the ability of a firm to
utilize one set

of resources to deliver a broader range of products and service.
Example are the elimination of unnecessary duplicative job positions, departments,
production plants, etc. Financial synergy describes the possibility of a reduction in
the weighted cost of capital of an acquiring firm if the cash flow streams of two
companies are negatively correlated because of the low risk of insolvency that
results as outcome of the merger.
The problem associated with synergy as a non plus ultra argument for a merger is
the quantification of its value in monetary term, e.g. dollars or euro. The models that
are used to calculate the value of synergies, such as net present value, are often
subject to a wide array of bias. First, management often underestimates the time it
will take to capture the synergies between two companies. Due to underestimation
of the time periods, the net present values of synergies are substantially
overestimated. Second, the acquirer’s lack of critical information about the target
and failure to conduct a bottom-up synergy analysis normally leads to synergy
estimations that are far from reality. The management of many companies fails to
understand that the mere existence of synergies between two companies and the
ability to derive financial gains from them by making use of the existing synergies
are two different things. Because of the problems associated with the quantification
and objectivity of synergies, vague and meaningless organizational terms are used
in merger proposals to highlight the benefits of a merger decision to shareholders.