New Evidence and Perspectives on Mergers

Abstract

mpirical research on mergers and acquisitions has revealed a great deal about their trends and characteristics over the last century. For example, a profusion of event studies has demonstrated that mergers seem to create shareholder value, with most of the gains accruing to the target company. This paper will provide further evidence on these questions, updating our database of facts for the 1990s.But on the issue of why mergers occur, research success has been more limited. Economic theory has provided many possible reasons for why mergers might occur: efficiency-related reasons that often involve economies of scale or other "synergies"; attempts to create market power, perhaps by forming monopolies or oligopolies; market discipline, as in the case of the removal of incompetent target management; self-serving attempts by acquirer management to "over-expand" and other agency costs; and to take advantage of opportunities for diversification, like by exploiting internal capital markets and managing risk for undiversified managers.Most of these theories have been found to explain some of the mergers over the last century, and thus are clearly relevant to a comprehensive understanding of what drives acquisitions. In addition, some of these reasons for mergers appear to be more relevant in certain time periods. For example, antitrust laws and active enforcement have made merger for market power difficult to achieve since the 1940s. The heyday of diversification mergers was in the 1960s, and there is evidence to suggest many of those mergers were ultimately failures. Mergers as instruments

What Drive the Damage to Post-Merger Operating Performance?

“…Similar to Healy et al (1992), Andrade et al (2001) also find that post-merger operating margin (cash flows to sales) on average strengthens relative to the industry benchmark. Specifically, they report the average abnormal operating performance, measured as the discrepancy between the operating margin of combined firms and the median operating margin of corresponding industry.…”

What drives acquisitions?

“…Despite the fact that such corporate actions should be viewed as value-enhancing strategic decisions, the empirical studies have not always documented positive wealth effects for acquiring firms" shareholders. The neoclassical theory of mergers modernized by Andrade, Mitchell, and Stafford (2001), argues that merger waves emerge to an extent from economic, regulatory and industrial shocks. Given these shocks, mergers facilitate the change of firms to a new competitive environment.…”

Study on theories and mechanisms of corporate governance

“…Moreover, change of control leads to efficient utilisation of resources at firm's discretion thereby creating further value (Jensen, 1988). However, a case of value destruction for share holders may arise if managers interested in empire building (and consequently increasing their own power and perks) waste resources by paying for the targets more than the actual worth (Andrade et al, 2001). Franks and Mayer (1996) examined UK hostile takeovers and found that takeovers are followed by high turnover among directors and a significant restructuring.…”