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Management article
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Reference no. SMR46305
Published by: MIT Sloan School of Management
Published in: "MIT Sloan Management Review", 2005
Length: 5 pages

Abstract

Unfortunately, many M&A deals fail to generate real value for shareholders - still others end up eroding corporate wealth. Much of the problem, says the author, stems from two inherent features of many deals - the acquiring company's difficulty in putting a value on the target's resources and the need for both parties to agree on a price. Obtaining accurate information on both sides is often a challenge, and when such information asymmetries exist, acquirers run the risk of overpaying or even of winding up with a lemon. The author evaluates methods companies can use to obtain better and more accurate information. Among the approaches described are ownership solutions (such as equity joint ventures or other forms of alliance) and contractual solutions (such as payments to the acquired company only when it meets performance targets). Obtaining accurate information enhances the decision making of acquirers and targets alike. Although using these sorts of methods may not completely eliminate information asymmetries, says the author, they may help deals to go through more smoothly, as well as aid in mitigating the risk of overpayment.

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Abstract

Unfortunately, many M&A deals fail to generate real value for shareholders - still others end up eroding corporate wealth. Much of the problem, says the author, stems from two inherent features of many deals - the acquiring company's difficulty in putting a value on the target's resources and the need for both parties to agree on a price. Obtaining accurate information on both sides is often a challenge, and when such information asymmetries exist, acquirers run the risk of overpaying or even of winding up with a lemon. The author evaluates methods companies can use to obtain better and more accurate information. Among the approaches described are ownership solutions (such as equity joint ventures or other forms of alliance) and contractual solutions (such as payments to the acquired company only when it meets performance targets). Obtaining accurate information enhances the decision making of acquirers and targets alike. Although using these sorts of methods may not completely eliminate information asymmetries, says the author, they may help deals to go through more smoothly, as well as aid in mitigating the risk of overpayment.

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