Glamour Mergers Fall Short in the Long Run.

Corporate merger mania may pad shareholders' expectations more than their pockets, a Purdue University, West Lafayette, Ind., study finds. When glamour companies acquire other firms, the stock for the acquiring company is likely to underperform comparable companies in the three years after the acquisition. Value acquirers, on the other hand, outperform their peers in the long term after the acquisition.

A glamour company is defined as one to which the stock markets assigns a much higher value than the book value of its assets--in other words, a company with a high market-to-book ratio. A value company is just the opposite--the book value is greater than the value of its stock.

"Glamour companies are the blue-eyed boys of Wall Street," notes Raghavendra Rau, assistant professor of management. "When their management announces an acquisition, both the market and the management have inflated views of their ability to manage the acquisition. The acquisitions tend to perform badly. Value companies, on the other hand, have performed poorly in the past. Their shareholders are more likely to be prudent in only approving acquisitions that actually create value."

On average, stock performance for the acquiring company in a glamour merger will be about 17% below average over the three years after completion of the deal, compared to the stock of like-sized companies with similar market-to-book ratios. On the other hand, the stock prices of acquirers involved in value mergers or tender offers ranged from 7.6 to 15.6% higher than those of like-sized companies with similar valuations.

Some of the underperformance by glamour companies is because many such mergers are stock-financed. Managers who feel that their stock...