EF4312 Mergers and Acquisitions Chapter 4 Are Acquisitions Successful

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EF4312 Mergers and Acquisitions Chapter 4 Are
Acquisitions Successful?
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Learning Objectives

• At the end of this chapter, you should be able to
  understand
• How success of mergers is assessed using a
  variety of perspectives
• How shareholder value creation in mergers can be
  measured and assessed
• The variety of empirical methodologies that have
  been developed for this purpose
• The limitations of these methodologies
• The results and conclusions form the empirical
  studies relating to the success of different
  types of mergers in different countries and
• The possible sources of value destruction and how
  they relate to different merger perspectives.

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Defining success of MAs

• Various merger perspectives suggest merger
  outcomes not always be beneficial to shareholders
  and other stakeholders
• Successful mergers are of interest to
  shareholders, managers, employees, consumers and
  the wider community
• How do we define success?
• Success criteria depend on each stakeholder
  perspective

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Defining success of MAs (cont)

• Measurement tools and benchmarks to assess
  success need to be carefully selected and their
  limitations clearly understood
• Main focus of assessment whether mergers create
  shareholder value
• Acquisitions and shareholders are they better
  off?
• Do shareholders of an acquirer earn returns at
  least equal to their risk-adjusted expected
  return?

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The benchmark problem

• If not the acquirer has failed to create value
• Impact of acquisition on shareholder returns
  the benchmark problem
• Is there an appropriate benchmark?
• What would have been the shareholder value
  performance of merging firms had they not merged?
• Extrapolating past performance understates merger
  performance if past performance would have
  weakened

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The benchmark problem (cont)

• Extrapolating past performance overstates merger
  performance if merger is designed to improve past
  performance
• Ideal benchmark forecast performance without
  merger
• Benchmark based on shared characteristic critical
  to performance e.g. risk, size, market to book
  value of equity
• Benchmark other firms in acquirers and
  acquirees industries

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The benchmark problem (cont)

• Shareholder wealth impact of merger
• When is it felt? timing the event
• How long is it felt? the appropriate event
  window
• If stock market efficient no need for long run
  assessment
• Researchers use a wide range of benchmarks, event
  times and event windows to overcome measurement
  problems

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Market assessment of performance

• Stock market assessment of acquisition
  performance
• The capital asset pricing model (CAPM) and merger
  impact

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Market assessment of performance

• Beta as primary determinant of stock returns
• CAPM not well supported by empirical evidence
• Other empirical benchmarks include firm size,
  market value to book value of firm and momentum
• Caveats in assessing stock return-based
  performance

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US evidence on target firm

• Empirical studies of merger impact on stock
  returns
• US evidence
• Short-run performance (Table 4.1)
• Distinction between tender offers and mergers
• Mergers friendly and tender offers generally
  hostile
• Targets make substantial gains whereas acquirers
  make nearly zero gains
• In tender offers both target and acquirer
  shareholders gain more than in mergers

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US evidence on target firm

• Long-run performance (Table 4.2)
• Overall small positive gains to target and
  acquirer shareholders combined
• Tender offers create more value than mergers
• Long run, acquirers in mergers suffer significant
  wealth losses but earn insignificant returns in
  tender offers
• Acquirers seem to lose out to targets in
  bargaining. So deal structuring and negotiation
  determine sharing of merger gains

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UK evidence on target firm

• UK evidence
• Short-run performance (Table 4.3)
• Target shareholders make substantial gains
• Acquirer shareholders suffer zero or
  significantly negative gains
• Long-run performance (Table 4.4)
• Acquirer experience value losses rather than
  gains

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European evidence on target firm

• Continental European evidence (Table 4.5)
• Short-run evidence limited to a few countries
• Target shareholders gain substantially and
  acquirer shareholders just about break even
• Target shareholders gain more in tender offers
  than in mergers
• Comparison of stock return performance in US, UK
  and Europe
• Broadly similar

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Evidence on acquirer

• Assessing the operating performance of acquirers
• Limitations of operating performance measures
• Subject to accounting manipulation and creative
  accounting
• Appropriate level of performance not clear
• Relationship to shareholder value weak
• Appropriate time lag arbitrary
• Accounting numbers backward-looking
• Benchmarks problems as with stock return measures

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US evidence on acquirer

• US acquirer performance (Table 4.6)
• Assessment sensitive to accounting measure and
  benchmark
• Profit measures indicate long run performance
  decline
• Cash flow measures indicate no improvement or
  significant improvement
• On average acquirers perform only as well as
  their industry counterparts or similar sized
  firms.

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US evidence on acquirer

• Acquisitions and innovation
• On resource-based view acquisition can enhance
  innovation capabilities of acquirer
• Risks to acquiring such capabilities high
• Limited empirical evidence on innovation
  performance
• R D intensity and patent intensity decline
  after acquisition
• Acquirers introduce fewer new products

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US evidence on acquirer

• Acquisitions, productivity gains and employment
• At plant level productivity improves after
  acquisition
• Employment reduction but managerial jobs and
  non-production jobs more at risk

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UK and European evidence

• Operating performance of UK acquirers (Table 4.7)
• Profitability declines but cash flow measures of
  performance improve
• 1980s mergers improved more than the 1960s
  mergers
• Related and hostile merger activity leads to
  smaller output decline than employment decline
• Mergers generate efficiency gains
• Operating performance of continental European
  acquirers (Table 4.8)
• Very few studies
• Merging firms underperform marginally and no
  significant outperformance

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Assessment the operating performance of acquirers

• Overview of operating performance
• Accounting profitability measures suggest
  performance decline
• Cash flow measures suggest no decline or even
  performance improvement
• Non-operating gains need to be added to operating
  gains
• Cash flow performance gains do not mean
  shareholder value gains

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Comparative performance of alternative corporate
strategies

• Related acquisitions horizontal mergers and
  vertical mergers
• Unrelated or conglomerate acquisitions
• Vertical mergers less frequent than horizontal
  mergers
• Revenue and market share growth important in
  horizontal mergers
• Empirical evidence that achieving revenue and
  market share growth very difficult
• Cost savings less daunting than revenue growth

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Acquisition performance influenced by bid
transaction characteristics

• Whether takeover is friendly or hostile
• Whether it is a tender offer or merger
• Relative size of target to acquirer
• Whether acquirer is a glamour or value stock at
  time of bid
• Whether acquisition is financed with cash or
  equity or a mixture of various methods

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• Impact of mergers on managers (Table 4.9)
• Acquisitions increase managerial compensation
• Top management turnover in acquired companies
  substantial
• In hostile acquisitions targets undergo
  substantial restructuring including top
  management change
• Rapid-fire, serial acquisitions increase the
  chances of acquisition failure
• No evidence that hostile takeovers are
  disciplinary aimed at correcting target companys
  pre-acquisition underperformance
• Mixed evidence on whether such underperformance
  leads to high top management turnover after
  acquisition

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Table 4.1 Announcement Period Surrounding
Abnormal Returns to Shareholders in US
Acquisitions
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Table 4.1 Announcement Period Surrounding
Abnormal Returns to Shareholders in US
Acquisitions (Continue)
1 Publication details of the cited studies are
given in Appendix 4.2. 2 Event window generally
spans the day or month of announcement of the
tender offer or merger proposal. Days are stock
market trading, not calendar, days. 3 All target
returns are statistically significant at 1
whereas bidder returns are generally
insignificant.
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Table 4.2 Post-acquisition Abnormal Returns to
Shareholders in the US
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Table 4.2 Post-acquisition Abnormal Returns to
Shareholders in the US (Continue)
1 Publication details of the cited studies are
given in Appendix 4.2. 2 Event window starts with
the bid completion month except that Dodd and
Ruback, and Maggenheim and Mueller start earlier
with the announcement date and 3 months prior to
announcement month respectively. Statistically
significant at least at the 10 level. Other
returns in this column are either insignificant
or the studies do not report the significance
level.
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Table 4.3 Announcement Period Surrounding
Abnormal Returns to Shareholders in UK
Acquisitions
1 Publication details of the cited studies are
given in Appendix 4.2. Goergen and Renneboog
sample also includes some failed bids. All
target returns are significant at 1
level. Significant at the 5 level or better.
Other bidder returns insignificant.
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Table 4.4 Post-acquisition Abnormal Returns to
Shareholders in the UK
1 Publication details of the cited studies are
given in Appendix 4.2. 2 Except for Firth and
Higson and Elliott, the studies report abnormal
returns from several of their models as
significant. Kennedy and Limmack do not report
level of significance.
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Table 4.5 Abnormal Returns to Shareholders in
European Acquisitions
1 Publication details of the cited studies are
given in Appendix 4.2. Goergen and Renneboog
sample also includes some failed bids. 2
Significant at 1. Other returns either
insignificant or significance level not reported.
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Table 4.6 Post-acquisition Operating Performance
Improvement of Acquirers Period
1 Publication details of the cited studies are
given in Appendix 4.2.
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Table 4.7 Operating Performance Improvement of
Acquirers in Post-acquisition Period UK Studies
1 Publication details of the cited studies are
given in Appendix 4.2.
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Table 4.8 Post-acquisition Operating Performance
of AcquirersContinental European Studies
Source 1Listed studies are from D. C. Mueller
(Ed.), The Determinants and Effects of Mergers,
An International Comparison (Cambridge, MA
Oelgeschlager, Gunn Hain, 1980)
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Table 4.9 Aftermath of High-level Acquisition
Activity
Source A. Blackman, Acquisitions Monthly,
January 1991