Where M&A Pays and Where It Strays: A Survey of the Research

Abstract

This article uses a large and growing body of academic studies to refute the popular notion that corporate mergers and acquisitions generally fail to increase productivity and end up reducing shareholder value. A careful review of the evidence starts by con. rming the obvious–namely, that the shareholders of selling firms earn large returns from M&A–and goes on to demonstrate an economic reality that is not widely understood: shareholders of acquirers generally earn about the required rate of return on investment, and hence M&A is at least a value‐maintaining proposition. Of greatest interest to corporate practitioners, however, is the very large dispersion of outcomes that underlies the average returns. Closer inspection of this variability shows that certain circumstances and company characteristics are reliably associated with value‐increasing M&A. In particular, acquisitions of related companies tend to be better received by the market and to produce higher post‐merger operating returns than diversifying transactions (though there are a number of successful instances of the latter). Other fairly reliable indicators of value‐increasing M&A are transactions involving mergers of equals or smaller, private targets (where the bidding competition is less intense) and deals structured as earnouts and financed primarily with cash rather than stock.

Consequences of Riding Takeover Waves: Australian Evidence

“…Agrawal and Jeffe ; Andrade et al. ; Bruner ; Martynova and Renneboog ). Some studies find that bidders experience significant negative abnormal returns in the first few years after a merger (e.g.…”

“…However, it remains controversial whether acquiring firms retain the value in the long run (e.g. Agrawal and Jeffe 2000;Andrade et al 2001;Bruner 2004;Martynova and Renneboog 2008). Some studies find that bidders experience significant negative abnormal returns in the first few years after a merger (e.g.…”

A Procedure for the Rapid Pre-acquisition Screening of Target Companies Using the Pay-off Method for Real Option Valuation

“…Acquisitions can be motivated by a number of reasons, e.g., efficiency increases, economies of scale and scope, and increase in the market share [5,6,7,16,24,25,26,29] just to mention a few. Irrespective of the motivation for the acquisition, companies want them to be wealth creating.…”

“…However, failure in the ex-ante acquisition screening of potential acquisition target companies can lead to problems already at the bargaining table during the negotiation stage, as well as, in the post-merger implementation [7]. A survey by KPMG [23] shows that pre-M&A synergy evaluation is the most important factor behind a successful M&A; it increases the probability of success by 28% according to the survey.…”

Supporting the Screening of Corporate Acquisition Targets

“…Even if acquisitions are very common, research results on their effect on company profitability and performance are mixed, and there is, e.g., no clear wisdom on wealth transfers between the acquiring and target company shareholders [2][3][4]. It seems that when done under the right circumstances and executed well, acquisitions can be highly profitable and win-win for shareholders of both the acquiring and the target companies.…”