Effect on shareholder value
Micheal Porter argues that measuring the success of corporate diversification by its effect on shareholder value “works only if you compare the shareholder value that is with the shareholder value that might have been without diversification”. 5One could add the even stronger requirement that all other influences would have to be held constants as well. But many factors go into corporate strategic planning processes.
Diversifications is only one dimension and is interdependent with many others. Given the many dimensions of corporate strategy, it is neither necessary nor informative to attempt to determine the impact on shareholder value of individual aspects of corporate strategy such as diversification alone. Porter also argues that the shareholder returns measure is defective because companies start from a “strong base”.
Winners and Losers
We can summarize merger participants into two general classes: “winners” and “losers”. On the winner’s side are clearly the stockholders of acquired firms. There is no doubt about it. Managers of acquiring firms are also probably beneficiaries, especially insofar as they use acquisitions for private ends, such as prestige, diversification of human capital, etc. Some of these managers no doubt live to regret these deals. Managers may be gaining, in the short run at least, at the expense of their stockholders. But the labour market may catch up with them in the longer-term. As Oscar Wilde said, “in this world there are only two tragedies.
One is not getting what you want and the other is getting it”. Society at large is a beneficiary of the merger process to the extent that mergers are an efficient mechanism for replacing less efficient by more efficient managers. But if the markets for executive labour and for corporate control are not functioning well enough to guarantee that management acts in stockholder interest, then society could be counted among the losers. If the market values of acquiring firms are systematically reduced by acquisitions, then investors will be less likely to commit their savings to corporate capital investment. And the system as a whole may suffer.
Other big winners undoubtedly include investment bankers, lawyers, accountants and of course, organizers of seminars on mergers and acquisitions. The losers are the managers of acquired firms who lose their jobs. And the risk of placing too strong a construction on the evidence some people think that the stockholders of acquiring firms are also losers or if not losers at best unharmed “bystanders”. Even if the evidence suggest that they do not lose much in market value, they must lose indirectly when the time and attention of executives is wasted in these huge, mostly futile takeover battles.
The economics of the market for corporate control
Although in 19th century saw a rapid growth in the numbers of corporations, they were mostly closely held concerns, organized around and financed by a single entrepreneur or a small group or private investors. And, of course, when “insiders” hold a large fraction of the outstanding shares, ownership and control are effectively united, thus ensuring a strong commonality of interest. To this day, there are still many corporations where the firm is owned and managed by a particular individual or an influential group of investors who clearly dictate the policies of the organisation. For most large public corporations, however, the proportion of shares owned by insiders is small and establishing who ultimately controls the firm is far from straightforward.
Beginning with the arguments of Adolf Berle and Gardner Means, many commentators have leaped from the observation that management holds only small proportions of shares to the conclusion that shareholders are therefore at the mercy of management.6 Corporate critics insist that the traditional legal view of the corporation as a collection of assets owned by stockholders is grossly simplistic. In fact, the large modern corporation is an elaborate legal fiction, a complicated network of contracts binding a number of different parties to the production activities of the firm. Stockholders are perhaps best represented as suppliers of capital, whose principal economic function is risk bearing.
They contract to be “residual” claimants, receiving the value of the remaining outputs only after the other inputs or factor of production, have been compensated. Their principal concerns are that the inputs of the firm are combined efficiently and that the outputs are distributed scrupulously according to the specific of the contract. The individual stockholders, who typically holds an investment portfolio diversified across a number of firms, generally does not know much – not perhaps even much care – about the day-to-day operations of the company.
Corporate decision-making is primarily the province of professional managers hired to run the firm. But, as most financial economists would agree, this specialization of functions has developed because of its efficiency. Although it has no doubt allowed some managers to exploit their stockholders, we can conclude that the benefits of such a development to the economy as a whole have far exceeded the costs.
But while it is undeniably more efficient to have professional managers controlling the day-to-day decisions of the corporation, stockholders and other contracting parties, such as employees, still require protection of their “investments”. Part of this monitoring of management is accomplished through the board of directors, who are supposed to oversee corporate decision-making. But another part of this protection is provided through the contract that binds stockholders, management, employees and other parties. The level of protection provided by the contract determines the price at which different parties are prepared to invest. In the case of employees, this means the total level, form, and certainty of compensation that includes them to commit their “human capital” to the firm. In the case of stockholders, it refers to the price they will pay for the shares issued by the corporation.
ACQUISITIONS AND MERGERS IN THE UK BY UK COMPANIES
These tables generally show the reported figures available from the financial press for the largest transactions in the quarter though occasionally, with the consent of the company, the value returned to National Statistics is used in the tables instead of the press reported figure.