Does operating performance really improve following corporate acquisitions?

What Drive the Damage to Post-Merger Operating Performance?

“…Empirical evidence suggests that the means of payment is an important determinant of the long-term post-acquisition performance: cash offers are associated with a stronger improvement than takeovers involving other forms of payment (Ghosh 2001;Linn and Switzer 2001;Moeller and Schlingemann 2004). A study by Healy et al (1992), which examined the operating performance of the 50 largest merger transactions, reports that operating performance improves following the transactions.…”

“…As in Healy et al (1992) and Heron and Lie (2002), Ghosh (2001) investigated the impact of the method of payment on the acquiring firms' post-merger operating cash flows. He included 50 largest acquisitions each year from 1981 to 1988, and adopted the methodology harnessed by Healy et al (1992).…”

“…He included 50 largest acquisitions each year from 1981 to 1988, and adopted the methodology harnessed by Healy et al (1992). Unlike Healy et al (1992) and Heron and Lie (2002), Ghosh (2001) provides evidence that the combined firms' cash flows strengthen significantly following cash mergers but deteriorate subsequent to stock mergers. He argues that the improvement in cash mergers results from the increase in assets turnover (sales per dollar of assets) and the decline in stock mergers is due to a significant drop in the assets turnover.…”

“…While some research indicates a significant improvement in the post-merger operating performance (e.g., Healy et al 1992;Heron and Lie 2002;Switzer 1996), others document a significant decline in the operating performance following mergers (e.g., Clark and Ofek 1994;Kruse et al 2002). In addition, some other studies reveal insignificant changes in the postmerger operating performance (e.g., Ghosh 2001;Herman and Lowenstein 1988).…”

“…This study re-examines the relationship between post-merger operating performance and payment method used to finance the merger, and also between post-merger operating performance and the industry of merged firms since empirical evidence on these relationships are mixed and researchers of the previous studies did not take into account merger waves and CEO overconfidence in their analyses (see e.g., Ghosh 2001;Healy et al 1992;Heron and Lie 2002;Linn and Switzer 2001). The findings of this study indicate that merger period and the industry of merged firms positively and significantly affect the post-merger operating performance.…”