Network of Exchange in Mergers & Acquisitions
Mergers and acquisitions are business transactions where the ownerships of two companies are consolidated into one unit. One of the most famous mergers & acquisitions deals recently is Microsoft’s acquisition of Activation Blizzard at a total value of $68.7 billion. This is one of the largest M&A deals in history. Besides finance calculations and market research, another way to look at how this extremely high valuation is arrived at is to analyze the network of exchange of this deal.
To better understand how the network is formed, we need to first understand what a M&A process look like. Prior to the M&A, the buyer would look for potential targets to acquire, and sellers would look for potential buyers to acquire them.
If only one buyer is interested, the network of change would be very simple two-node network, as shown below:
A represents Microsoft, the buyer, and B represents Activision Blizzard, the seller.
In theory, the buyer and seller should have the same level of power. However, in an actual M&A process, the seller would be in a more passive position, since most companies would want to sell their business only when it is highly necessary (they are facing cash flow issues, etc.). Thus, the seller’s power would be slightly lower than the buyer’s power in this network.
To make sure the seller can receive higher valuation and help the seller gain more power, the investment bank advising the seller would usually contact multiple potential buyers. This is exactly what happened in the Microsoft-Activision deal. Besides Microsoft, there are many other buyers interested in acquiring Activision Blizzard, and an updated and simplified network of exchange would be:
B is Activision Blizzard, A is Microsoft, and C is another buyer.
In this updated network, as Activision Blizzard negotiates with Microsoft, it also has the choice to fall back on its alternative with C, whereas Microsoft has no other alternatives (they have expressed interests to acquire Activision Blizzard multiple times during the past). This largely increases Activision Blizzard’s bargaining power within the network, which also contributed to the high valuation they received in the end.
Sources:
https://news.microsoft.com/2022/01/18/microsoft-to-acquire-activision-blizzard-to-bring-the-joy-and-community-of-gaming-to-everyone-across-every-device/
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