What are the Causes and Effects of Mergers and Acquisitions? The UK Evidence
Background to the Study
Mergers and acquisitions take place all the time in the business world, not always amicably (remember the fuss when Kraft swallowed up Cadbury?). Commercially, the performance of the bidding company may vary before and after the acquisition as the markets respond. In these cases, previous research has suggested that the benefits typically accrue to the shareholders of the target firms, as the share price rises prior to buyout, while the bidding firms generally experience a loss.
Yet if this is the case, why do mergers and acquisitions continue to take place? Bearing this and other questions in mind, researchers from the universities of Durham and Surrey undertook a study to investigate the nature of links between causes and consequences of these mergers in the United Kingdom, focussing in particular upon the performance of the merged (or acquiring) company after acquisition.
Researching Mergers and Acquisitions
Work from other studies has indicated a possible causal link between a firm’s performance and its acquisition of another company: other work suggests that not all takeovers are beneficial. The study team point out that these two theories aren’t necessarily mutually exclusive and they set out to examine whether there is a direct link between cause and consequence – or, as they put it, “takeovers must happen for the right reason”.
Researchers set out to test three hypotheses – that those bidding firms with high performance before acquisition experience poorer performance afterwards; that those bidders using stock as payment perform less well in the long run than those using cash; and that companies involved in many small acquisitions perform better than those whose target companies are fewer and larger.
The study team undertook a large-scale statistical analysis of company acquisitions over a period of 19 years – total of 8,752 transactions. Comparing pre-and post-acquisition performance and then examining this in the light of both the method of payment and number and scale of acquisitions allowed them to test each hypothesis and reach a statistically significant conclusion.
Causal Factors in Mergers and Acquisitions
The results of the statistical analysis for the first hypothesis show a causal link between performance and mergers – and that it is the good performance which causes acquisition, rather than the reverse. Both of the other hypotheses were confirmed by the analysis – clearly demonstrating a better performance resulting from cash acquisition and from a series of smaller takeovers, rather than fewer, larger ones.
By Jie (Michael) Guo (Durham University, Durham Business School and Dimitris Petmezas (University of Surrey, School of Management). Published in Multinational Finance Journal, 2012, vol. 16, no. 1/2, pp. 1-27.