If there's so much academic opposition to M&A, why does it exist?

Hey, thanks for your message.

The short answer is that so much more goes into an M&A strategy than does it create shareholder value.

From a practitioner perspective - the M&A strategy is how much competitive edge do you gain, while from an academic perspective it is - yes but how much does this competitive edge will cost your equity owners.

The wider question is: is management an optimal agent for the company. Is there capture, is there hubris etc. And again we could spend 10PhDs on it and it probably wouldn’t affect the industry.

Best.

Everyone knows that going to the casino is not a winning strategy yet so many people do.

It is about thinking that you are better than the others and that you can succeed where they failed.

Furthermore, there is a constant need for growth with pressure put on exec who likely cannot reach expected results only by organic growth (thus getting fired or stock crash). Lot of M&A deals end-up having great outcome though and it is sometimes lifesaving for the company which is bought (insolvency, too small for their market, synergy gains, etc).

Not saying that this a great, more and more people tend to think that we need to rethink the global economy on a degrowth model for sustainable aspects and shit

I don't have a full answer as their is probably none but those are the main points I see

It’s a classic principal-agent problem. Management team of the acquirer is the agent and the agent’s main objective is increasing their compensation.

All things equal, Bigger company = Bigger Comp for management team

Academics care about ethicality. Investors care about profit. That's what separates it.

Think about it like this, you're a shareholder that is looking for the most value to come from your investment into the company's shares. You have substantial voting power, so when an accretive deal with lots of synergies comes your way you go for what YOU want. Not what society wants, not what the company's customer wants, what you want. 

You don't care about how it affects the environment, or if someone gets cancer from the chemicals you put in the lake. You care about the real value potentially generated from a tool. Nor do you care about how many people got fired for you to be richer. You don't think about all of that, because you know it'll muddle your head.

Academics do not have the inclination to only focus on the shareholder perspective, because there are so many stakeholders that are affected more. 

Sure you can argue about "Oh but what about ESG investors??" ExxonMobil is on ESG indexes. The marketplace for that type of ethical investing is skewed from inception.

When organic growth is too hard/impossible, and the C suite needs revenue & EPS to increase so their bonus hits, then academics are disregarded and they go for the $$.

They hate us cause they aint us

Usually, acquisitions are valuable: It's easier to buy already established infrastructures, you cut out competition and the sellers get a premium to erase their desire to compete in the marketplace (win-win).

In terms of mergers, they're only a tool for corporations - it's neutral - the outcome depends on the user. In practice, the bad mergers pointed out by academics (fair enough, the majority) are when managers feel the pressure of shareholders to always prove that they're expanding and growing the company. Because of this pressure, when there are no new investments to make, no new ideas on how to improve further operations, etc. they may do an M&A to send the message that they're engaging in activities aimed to expand companies. This "forced" merger destroys value because allocates capital and effort into something that wasn't needed to begin with.

I’m sure the more cynical explanations here are true to some extent in some circumstances. However I want to talk about a different perspective. 

There is no one monolithic M&A deal type that only destroys or creates value. There is a crucial variance in outcomes in the cross-section of M&A that you cannot just gloss over (large-cap public, SME private, by strategics, by sponsors, etc.). A lot of what academics can look at is public M&A and the dynamics of that can be vastly different to private M&A of small companies. 

From my personal experience having worked on a very large acquisition between two public companies, yes I can see a lot of ways in which these go wrong all the time. However, I’m now an LP and I see how good GPs can execute buy-and-build (especially in the LMM / MM segment) and generate real (shareholder but also stakeholder) value.

96% of publicly listed companies in aggregate matched the returns of one-month t-bills. Clearly  the academics should be against investing in public companies /s
 

I think the academics are looking at averages when they need to be looking at aggregates. The stock market created $40T of shareholder value with just 4% of publicly listed stocks. It doesn’t matter to the total stock market that 96% of acquisitions fail if you get 4% of acquisitions that look like Google acquiring DoubleClick, Android, and YouTube which probably created $1T in shareholder value alone. 

Those who can’t do, teach.

Finance 101 (or Econ 101? whatever) is able to explain how M&A is a a stupid idea, yeah.

It's also able to explain why it happens so often, though. See: negative externalities.

I think an issue is that these studies only look at large public deals because they rely on having access to publicly available data. If these academics were able to study smaller, private MM or LMM deals then they would realize that they are often no-brainers. There is a reason many private equity firms pursue add-on strategies and these firms are incentivized by value creation, not just creating growth unlike some public company management teams.

Will give some of my thoughts and ideas. Some of these are more speculative than others, so certainly would welcome clarification from someone with more insight/knowledge.

1) Defensive Move - Could be a risk reducing move. Just like buying insurance reduces regular cash flow but gives downside protection. Some companies acquire to protect against future disruption or challenges. I suspect this practice probably varies a lot by industry.

2) Leaning Curve - Like most other things in life, it could be an acquired skill. Companies may need to try a few or even many times before they get it right. These "trials" could be causing a lot of those value-destroying M&A cases.

3) Overconfidence - Kind of similar to #2. Lots of people think they're good at something when in reality, they really aren't. Same may be for companies. Everyone thinks they can do it, but it's usually a lot harder than it looks.

4) Sales/Persuasion - I believe I read something about Warren Buffett complaining about bankers give self-serving advice. Telling him his companies need to make this acquisition now only to a few years later tell him he needs to spin it off; all under the guise of M&A value creation. It wouldn't surprise me some naive companies inexperienced with M&A get excited in the deal making process based on what some banker is telling them; not realizing bankers make money on fees, not on client shareholder returns.

5) The Deal - I remember a professor talking about the KKR-RJR Nabisco deal. His recounting was KKR got so caught up in the excitement of making the deal they lost sight of paying a sensible price. Makes sense given all the headlines and media attention that was going on. I'm thinking the same idea happens to companies (though probably not with as much fanfare). They just caught up in the excitement and forget to exercise a Benjamin Graham type of discipline to not overpaying.

No body can stop reggae

So many interesting things in this thread…academics don’t have to prove it is a big part of this. We can all manipulate data for a desired outcome.
 

The claims that 70% of deals are dilutive has been around for a long time. Maybe it’s true, but it’s not in my personal experience. The buyer must make a rationale choice on buy vs build. That’s what M&A ultimately comes down to. a buyer wants to enter a market or product and sees a faster path through acquisition. Sometimes the buyer gets sold a lemon, but that’s on the buyer. 
 

if the academics were so awesome, they’d be running the world. They only think they are…

(1) Because every academic analysis is necessarily flawed. In the absolute best case scenario you run into the same problem EMH has: the joint hypothesis problem. Even with the best data possible you can never actually know if a deal is good or bad since you can’t go back in time and change a variable.

(2) Because, even if you take the academic’s view as true, that most deals are value destroying, there are some that are value adding. And all it takes is for something to be possible for CEOs to be interested

M&A is prestige

who gives a fuck what the "academics" think. every great man in history has always hated the "intellectuals". anyone who works in academics is a scam artist hiding behind credentialism 

Because nothing is more prestigious than M&A, except for private equity and hedge fund

Let me give it a crack. 

Unpacking a few pieces (which have already been covered anyway, but want to show my support for these views):

1. Academic to Finance links are notorious. The quantification of things in Finance ('shareholder value' for one) leads people to believe it is similar in explanatory power to things like Physics. This is simply not correct. I view Finance as an applied form of economics, which is just a social science. Social sciences are pretty lousy at explaining the real world with 100% reliability. 

a. An example - Finance proposes the efficient market hypothesis, this is in practice incorrect. For one, even the academics call it a 'hypothesis' and not 'law', for two you have to 'assume' away things like taxes, transaction fees etc, for three you have people like Warren Buffett. 

b. Therefore Academics saying M&A is bad does not hold much reliability in the 'applied' sense, only in a theoretical sense, this theoretical sense means you need to go down a rabbit hole of what constitutes shareholder value, which is not something that is actually observable (in which case there can't be any agreement). 

c. 'Majority' does not make something 'more correct' - just as another aside, in many population of 'things' that end up with a normal distribution you get a clustering around the mean, so if academics say 70% M&A is bad, that's akin to saying 'on average hedge fund returns are sub-optimal', however in situations of 'winner takes all', this is actually deceptive, because you instead want to focus on the tail, the 'outperformer' who is winning from the rest of the population. A more accessible example is looking at sport teams, there's only one winner, but 'on average' the X amount of teams playing don't win. That is, if you're the company that is ABLE to pull off an M&A that is 'value accretive' you actually get a double benefit (the intrinsic value you're creating, as well as the market signal you put out attracting more shareholder capital, and thus a higher share price).    

Kind of funny that academics, whose job description involves creating nothing and never attempting to, write papers criticizing people who create value for not creating value frequently enough. 

The main reason is that academics are looking at averages across all M&A transactions, whereas practitioners are looking at individual deals.

Academics are correct in a general sense that most M&A deals destroy shareholder value (although someone above has already made a good point that their data is skewed, because only large cap public transactions have readily available data).  But even if an average M&A deal destroys shareholder value, there are definitely certain deals that create significant shareholder value (like if there are genuine synergies, if it's a truly strategic acquisition etc).

The problem is, everyone thinks their deal is one of the ones which is actually creates value, and that's obviously can't always be true.  It's a little bit like the phenomena of how everyone thinks they're an above average driver (despite that obviously being impossible).

While the academics are technically correct, it's a good example of how averages can be a really misleading.  Whenever someone presents an average as evidence of something, you always need to think about the dispersion of the data around the average.  

"Why do people do M&A when it usually destroys value"?""Why do people start businesses when over 50% of small businesses fail?"People take risks. Welcome to the world of business.

I want to do M&A at the Goldman Sachs.

Ummmm, because bankers are not academics? They exist to keep making deals happen. They want the fees and couldnt care less abt LT value creation - if the deal flops they can deflect the blame without much difficulty.

Short answer there obviously

Well as there is criticism against M&A, it’s also a highly integrated part in a lot of theories - especially within the international business field, where M&A or FDI as it’s called is an integral part of globalization, global production networks etc.

What do you mean by "academic opposition" though? Every transaction involves a party gaining and a party losing (financially) in the end. It empirically well documented that buyers are on average at significant risk to overpay and effectively destroy shareholder value. But why would that equal academic opposition? There is still a "winner" (the target's shareholders often). Also M&A returns are skewed - the average deal might work not very well but there a lot of success stories with huge gains as well - so maybe think of it a bit like VC investing. And you also wouldn't say VC faces "academic opposition", even if studies there show as well that the average deal IRR is way below public markets or LBOs while risk is higher. 

From a value destruction perspective, it is important to consider that while research evidence suggests that M&A often result in value destruction for buyers, it is not right to assume a causal relationship between M&A and value destruction. For instance, It is possible that the buyer firm's performance could have suffered even more if they had chosen not to pursue M&A. However, it is worth noting that conducting a controlled experiment to simulate such a scenario is not feasible. As a result, drawing a definitive conclusion that M&A directly leads to value destruction is inherently flawed. Also, academics recognized the winner's curse, which is the fact that the winner of the bid, i.e., buyers, usually overpaid.

Moreover, there are multiple cases where M&A leads to value creation for buyers, not to mention that usually M&A creates value for target's shareholders.