Merger Motive and Performance: The less sexy, the better
Laatst gewijzigd: 20 juli 2023 10:13
It has been suggested that to understand mergers, one needs to start with an understanding of the underlying motive behind the merger (Shrivastave, 1986; Bower, 2001; Javidan et al, 2004; Schweizer, 2005). A plethora of merger motives have therefore been described by the literature (Trautwein, 1990; Mueller, 1995). But can the purpose behind the merger be used to predict the performance of the merger?
Theoretically yes, but empirically the evidence on the topic of merger purpose remains surprisingly limited.
To fill this gap, and to test the proposition that the initial merger motive can be used to predict eventual performance, we first built a sample of 3,257 mergers and acquisitions, announced and completed in the period 2000-2008. Next, and using the official text of the merger announcement, we identified four of the most commonly announced merger motives: (1) ‘strengthening existing operations’; (2) ‘product diversification’; (3) ‘geographic expansion’; and (4) cost-cutting. Finally, we matched merger purpose to stock price performance — controlling for other factors known to impact performance — to consider if merger motive can, in a statistically significant sense, predict performance.
Table 1 provides a breakdown in the number and type of merger motives announced per industry, and Figure 1 provides a visual description of the same date. It is interesting to note that acquirers, on average, announce 1.6 merger motives. We find that ‘product diversification’ is the most commonly announced merger motive (61% of deals), and ‘product diversification’ is the most popular merger motive in the manufacturing, communications, services and agricultural sectors. ‘Strengthening the market share of the acquiring firm’ is the second most common motive (59%), and deals which aim to enhance the market share of the acquiring firm are popular in the mining, construction, transport, wholesale, and insurance sectors. ‘Geographic expansion’ is third most commonly announced motive (25%), and is a popular merger motive in the financial sector, while cost-cutting is the least commonly announced motive. In the 8 year period of our analysis only 7% of acquisitions seek to reduce the costs of the combined firm.
Table 1: Merger Motives per Industry
Table 2: Frequency of Specific Merger Motives per Industry
Relating announcement type to the stock price performance of the acquiring firm, we find evidence that the market responds quite differently to each of the distinct merger motives. Controlling for a number of other variables which are known to impact performance, we find that the market: (1) responds negatively and significantly to the announcement of an acquisition that aims to expand the product portfolio of the acquiring firm; (2) does not respond in a statistically significant way to the announcement of a ‘market strengthening’ acquisition; (3) responds negatively and significantly to the announcement of an acquisition that seeks to expand the geographic reach of the acquiring firm; and (4) responds positively and significantly to the announcement of a cost-cutting acquisitions. These findings may be because, as Houston et al (2010) suggest, in a study of 64 US banking mergers in the period 1985-1996, acquiring firms typically realise about 60% of their cost—savings forecasts, and as little as 7% of their expansionary forecasts.
Figure 1: markets respons negatively to merger motives in red
In doing so, we can create a form of hierarchy in terms of merger motive: the market responds negatively, we can conclude, to expansionary merger motives, indifferently to market-building acquisitors, and only positively in the case of cost-cutting acquisitions. Because only 7% of acquisitions announce cost-cutting motives, this finding goes some way to explaining the finding at between 65-86% of mergers fail to create value.
The managerial implications, however are clear: managers have long-overlooked the less exciting cost-cutting acquisitions, in favour of the more sexy, expansionary acquisitions, but in terms of creating value, and pleasing the market, the less sexy, the better!
Over de auteur:
Dr. Killian McCarthy is assistant professor bij de University of Groningen. Hij behaalde zijn PhD in economics of corporate strategy in 2011, voor zijn onderzoek over overnameprestaties. In dit onderzoek evalueerde Killian de prestatie van 35,000+ deals in Europe, Noord-Amerika en Azië in de periode 1990-2010.
References
- Bower, J.L. 2001. Not all M&As are Alike – And that Matters, Harvard Business Review, 79(2): 93-101
- Houston, J.F., James, C.M., Ryngaert, M.D., 2001. Where Do Merger Gains Come From? Bank Mergers from the Perspective of Insiders and Outsiders, Journal of Financial Economics, 60: 285-331
- Javidan, M., Pablo, A., Singh, H., Hitt, M., and Jemison, D., 2004. Where we’ve been and where we’re going, in: A.Pablo and M. Javidan (Eds) Mergers and Acquisitions: Creating Integrative Knowledge, 245-261, Oxford, UK: Blackwell.
- Mueller, D.C., 1995. Mergers: Theory and Evidence," in G. Mussati, ed., Mergers, Markets and Public Policy, Dordrecht: Kluwer Academic Publishers, 1995, pp. 9-43.
- Schweizer, L., 2005. Organisational Integration of Acquired Biotechnology Companies into Pharmaceutical Companies: The Need for a Hybrid Approach, Academy of Management Journal, 48(6): 1051-1074
- Shrivastava, P. 1986. Postmerger integration. Journal of Rusiness Strategy, 7(1): 65-76.
- Trautwein, F., 1990. Merger motives and merger prescriptions. Strategic Management Journal 11, 283–295.
