Mergers and Acquisitions: The Market for Companies. An Application of Asymmetric Information
INTRODUCTION I was, for many years, in charge of finding and analyzing acquisitions for a large company. Then, for two years, I was an independent merger broker and took part in negotiations. MERGERS AND ACQUISITIONS American corporations spend over $1 trillion a year buying other companies. This is more than they spend on net new investment. Even more than they spend on boxes at pro sports stadiums. Buying another company is a risky corporate strategy. The few studies I have read indicate that 70-80% of acquisitions are failures. They do not earn the acquirer’s opportunity cost of capital. Many are a total loss and result in future write-downs. This failure rate from published research is similar to the information I collected. My department would use discounted cash flow/net present value analysis to determine the maximum price we would pay for an acquisition (the present value of the future net cash flo...