Mergers and Acquisitions: Does the Government have a role to play?
|Date:||24 March 2017|
The Dutch M&A market is booming. Major Dutch institutions, like PostNL, AkzoNobel and Unilever, have dominated the headlines of late, having all been approached by foreign acquirers looking for new targets. Many observers have been left wondering whether this a good thing or a bad thing. And what should the role of the government be in regulating the market for mergers and acquisitions?
In terms of the first question, over 100 years of academic research on the topic suggests that mergers and acquisitions are, at the very least, a very tricky way of doing business. The evidence reveals that about 70% of mergers and acquisitions fail, and that about 65% of mergers and acquisitions fail so badly that they are divested within 5 years. Mergers and acquisitions fail because on average, only 7% of the growth forecasts and only 60% of the cost-cutting synergies underlying the acquisition are realised. And when they fail, they fail badly: a study of 87 billion-dollar deals, announced in the period 1998-2001, revealed that shareholders lost $2.31 on every $1 invested in mergers and acquisitions. But the damage doesn’t end there: mergers and acquisitions hurt shareholders, result in job losses, reduce innovation, and can severely damage competition. Mergers and acquisitions don’t just increase market power, which drives up the prices we pay, they can also lead to the creation of the ‘too big to fail’ firms that complicated the financial crisis.
So is there a role for government in managing mergers and acquisitions? Writing in the Financieele Dagblad, and speaking on BNR radio, Rients Abma, the Director of Eumedion, says no. In a free market, he suggests, it is the responsibility of the shareholders, and the boards that they install, to run their businesses, and government should only intervene to protect critical national resources. With the greatest of respect, I would suggest that this is an old-fashioned and out-dated answer.
Yes, shareholders are the ultimate owners, and the boards that shareholders install are empowered to make decisions. But since at least the 1980s, we know that managers often take advantage of information asymmetries between what the managers know and the shareholders don’t to make self-interested decisions. Research shows, for example, that up to 80% of acquisitions in the 1980s were driven by managers looking to build empires rather than create shareholder value. I would argue, therefore, that shareholders should welcome government intervention as a way of protecting themselves from self-interested managers doing self-interested deals.
I would also argue that, from a societal perspective, there is a role for government intervention. PostNL, AkzoNobel and Unilever may not be critical national assets, but they are significant organisations, and there is a public interest in their success. We don’t know how an acquisition would turn out in their case – we don’t know whether or not they would be part of the 70% that fail, or of the 30% that succeed. We do know, however, that an acquisition will result in job losses, and as the acquiring company looks for ways to consolidate, we also know that they will reduce innovation. I would agree with Abma that when the local greengrocer or architect is taken over, there isn’t a role for government because there isn’t a national interest in the survival of the local greengrocer or architect. But in the case of institutions that make such a contribution to the Dutch economy I strongly disagree, and would in fact argue that there is a duty on the part of government to ensure that the acquisitions it oversees have a positive impact on the Dutch economy.
In 2007, we had a financial crisis, in part due to the free-market ideology. This ‘belief’ system is all well and good, and it is one that I would advocate. However, when the evidence does not support the belief then we must update our beliefs. And in this case, the evidence does not support the hypothesis that mergers and acquisitions create value, or that they positively contribute to the economy, and therefore I would argue that there is a role for government intervention.
Dr Killian McCarthy is Assistant Professor at the University of Groningen, an economist by training, and a specialist in the performance of mergers and acquisitions.