Theoretical Foundations of Mergers and Acquisitions: Mapping Strategic Rationales

The aim of this study is to present the pertinent theories underlying the mergers and acquisitions (M&A) deals. M&As are an important business strategy and a vehicle for firm’s growth. Each M&A deal differs in the strategic intent for which it is undertaken. Researchers have explained these different motives behind the M&A deals by theories which are developed based on the repeated examination of the empirical evidence. This study makes an attempt to present a detailed view of such different set of principles explained by theories of M&A. It was found that the major theoretical foundation in the domain is built on the market power theory, efficiency theory, resource-based theory, agency theory, hubris hypothesis, free cash flow theory, synergy theory and diversification theory. Each theoretical framework offers a different perspective on the strategic, financial, and behavioural motivations behind the M&A deals. It was observed that the primary strategic intent behind M&A deals is synergy realisation whereas, other leading objectives are market power, resources and diversification. Further, this study presents the relevant industry cases where corporates either undergo merger or acquisition with respect to their theoretical motives. The practical implication of the study is that managers must understand the key causes of the M&A deals which will help them in better strategic actions after the deal according to its core motivation. This will help the managers in efficient use of resources, effective integration and higher likelihood of synergy gains.