Do Mergers Create or Destroy Value? Evidence from Unsuccessful Mergers

Abstract

ABSTRACT:In this study, we examine unsuccessful takeover attempts for new evidence on whether mergers create or destroy value for acquirers and targets. We contribute to the literature in three important areas. First, we contribute to the literature on signaling by investigating whether a takeover attempt signals investors about the quality of firm management as well as the quality of the specific firm investment under consideration. We find that bid announcement returns are partially, but not completely, reversed by termination announcement returns, evidence that the merger proposal itself contains information about the value of the bidding firm. Second, we contribute to the literature on the value of diversification by examining how merger bids and terminations affect the relative values of bidders attempting diversifying and focusing takeovers.Our evidence enables us to differentiate between the synergistic and agency views of mergers.We find significant differences in the responses of firms attempting focusing versus diversifying mergers. The reversal of bid announcement returns by termination announcement returns is significantly different for focusing and diversifying firms. There is no reversal for diversifying firms while there is a partial reversal for focusing firms. This provides evidence in support of both the synergistic and agency views of mergers. Synergies are evident in focusing mergers while agency costs are evident in diversifying mergers. Third, we contribute to the literature on the valuation effects of mergers by using data from the 1991-2000 period to re-examine the important topic of who wins and who loses when mergers are terminated. Previous research examining terminated mergers has relied exclusively upon data from the 1980s.

Target’s financial performance in corporate acquisitions: BRICS evidence

“…where NI -net income as stated in income statement at the end of the year; аverage total assets -average total assets over the year as stated in balance sheet . This approach does not allow to take a closer look at the changes in the financial performance of the firms after the acquisition, but it gives an opportunity to take into account the possible effects of financial synergy arising between organizations [Cole, Vu, 2006] . G .…”

“…Another motive to conduct an acquisition is a synergy effect that happens after M&A deals as a result of sharing knowledge and resources between organizations . According to [Cole, Vu, 2006], mergers and acquisitions can create value by making operating synergies that can happen in the form of economies of scale or economies of scope . The researchers state that economies of scale have the highest chances to be realized when companies operate in the same line of business Target's financial performance in corporate acquisitions: BRICS evidence РЖМ 20 (1): 28-51 (2022) combine operations while economies of scope is likely to appear when both firms are in the same chain of supply combine operations .…”

“…At the same time when deal parties are engaged in completely unrelated business operations or operate in different industries the deal benefit is not transparent . Nevertheless, [Cole, Vu, 2006] point that such deals (known as conglomerate M&A) can obtain financial synergies as opposed to operating ones . By having cash flows diversified through the acquisition of firm operating in another sector, a bidder can borrow at lower interest rates (looking more solvent and reliable for banks) and decrease its weighted average cost of capital .…”

“…The idea relates to conglomerate acquisitions and supposes that firms acquiring targets that operate in unrelated industries apply this strategy to reduce risk and ensure future cash flows coming from new business segments . Besides, conglomerate acquisitions allow firms to increase their performance through obtaining financial synergy [Cole, Vu, 2006] . Thus, the research design requires to control cross industry factor through a new variable .…”

The Effect of Takeovers on the Performance of Acquirers in Australia Based on The Economic Value Added Method

“…They compared the operating performance of the bidder companies before and after the acquisition and indicated that the operating cash flow performance for combined firms improved significantly after acquisitions (Rahman & Limmack, 2004) [7]. Vu investigated failed takeover efforts in search of new evidence about whether mergers add or subtract value for acquirers and targets two months before and after the bid (Vu & Cole, 2007) [8]. Evaluation of acquisitions occurring from 1989 to 1993 reveals that the raw EVA of the acquirer company declined significantly after acquisitions, caused by the industry factors (Yook, 2004) [9].…”