Several studies show that acquisitions generally end up transferring wealth from acquiring companies’ shareholders to those of the acquired. In other words, the information from the market and from balance sheets is that the price paid for acquisitions is at a level that would not allow financial returns above the investors’ cost of capital. Therefore, if the quest for financial results is not the driver of mergers and acquisitions, then what other reasons could influence executives’ decision to engage their companies in such activities? What could be the rationale of mergers and acquisitions?

Finance theory defines that managers make investment decisions targeting either an increase in their shareholders’ wealth, or benefits for themselves. The reasons for mergers and acquisitions can be viewed in the same way: they aim for a financial improvement to the company or, primordially, the well-being of its managers.

Mass behavior would be one of the main reasons for executives to acquire other companies. In a flourishing asset-buying market, managers would be incapable of psychologically dealing with the waves of acquisitions, especially in their companies’ fields of activity. This frenzied and simultaneous quest would be responsible for the premiums paid to shareholders of the targeted companies and, therefore, for the low returns verified by the acquiring companies’ shareholders.

Another reason for acquisitions is appreciation of the stock market and the informational asymmetry between managers and investors. Managers, with their own perception of the company’s intrinsic value, and this perception of value being lower than the one imposed by the market, involve their companies in acquisitions, paying for them with stocks from their own companies aiming to increase their shareholders’ wealth. In this manner, payment for acquisitions through stock issuances or swaps would have a higher chance of taking place in the stock market. Nevertheless, a market high would make managers pay dearly for acquired companies, pushing down their own companies’ value after each event or making it difficult to achieve satisfactory financial results.

The search for strength and placement in the market would be another stimulus to mergers and acquisitions. According to monopoly theory, these operations would be one of the instruments employed by managers to improve the market strength and placement of their companies in the eyes of their customers, suppliers, and employees, for example. This strength and the eventual creation of a monopoly or oligopoly would enable producers to extract and maintain a larger part of the chain’s and the industry’s profits.

Sectorial shocks would also turn executives toward mergers and acquisitions. The economic disturbances caused by such shocks would set off waves of mergers and acquisitions from the moment when buying would become cheaper than internal development, whereupon acquisitions could be viewed, in a simplified manner, as a ramification of the decision to buy. These sectorial shocks would result from unexpected changes in demand, in the available technology, in the movements of the capital market, and in barriers to entry into a sector.

Herd mentality is one of the reasons for executives to acquire companies, pay high premiums, and generate mediocre results

Administrators gain power with the growth of their organizations, even when this strategy oversteps optimal sizing

Another reason would be a quest for growth. Companies have the choice of achieving this goal by fomenting an expansion, generated internally or through mergers and acquisitions. Strictly in-house growth can be a slow and uncertain process, whereas growth created through acquisitions is faster, but carries with it other uncertainties. At a time when managers are under constant pressure to show their companies’ growth potential, acquisitions would be the fastest way to accomplish such a goal.

The rationale of mergers and acquisitions is that they should bring benefits that shareholders would be incapable of achieving on their own, and the synergy brought about by acquisitions is constantly used as a reason for such activities. In acquisitions, synergy would be reflected in the new company’s capability of presenting higher profitability than the sum of profitabilities of the individual parts. Activities with a direct impact on a company’s growth capacity and wherein speed of execution is the critical factor for success, such as research and development (R&D), entry into new geographic markets, and product launches, are the ones who would benefit the most from acquisitions.

In turn, the high price paid for acquisitions and faith in synergy achievement would be motivated by managerial pride, as there is sufficient evidence that financial returns from the acquisitions would be difficult to achieve. This pride would lead to a belief or irrational behavior by the manager, which would justify their insistence in following through with an activity where so many others failed. The acquisitions would be driven by assessment errors by managers as to the possibility of gain, especially synergistic gain.

Finally, mergers and acquisitions would be encouraged by the differences in objectives between managers and investors. Some authors defend that these activities would exercise a corrective role on management inefficiencies, i.e., underperforming companies would be constantly under threat of acquisition, forcing managers to refine their investment decisions. Hence, the acquisitions market would serve, in and of itself, as a mechanism for alignment of the goals of executives and shareholders.

Another line of research, however, affirms that mergers and acquisitions would be used by managers as instruments to further their own goals, such as increasing their power through organizational growth, or reducing their business’s risk. Increase of managerial power, for instance, would be achieved through the search for growth of their companies, even if this would overstep an optimal size. Growth would increase managers’ power by increasing the resources under their control, and would be associated with higher pay. Thus, even if mergers and acquisitions did not improve the financial results of acquiring companies, these activities would be undertaken due to the lack of mechanisms to align the goals of managers and investors. Corporate governance practices aim precisely to reduce the conflict of interests between these two players.

The economy’s dynamism and the capital market’s development foment mergers and acquisitions. On the other hand, due to the magnitude of the amounts they involve, such investment activities are complex and have significant impact on the results of acquiring companies. However, the financial results achieved by such companies are not visible. Understanding managers’ reasons to involve their companies in acquisitions may help in the decision-making process, in the definition and negotiation of the targeted company’s price. Thus, the acquiring company can more easily generate wealth, which is one of managers’ main goals.