M&A and performance: empirical evidence from European companies listed on the U.S. stock market.

Author:Caselli, Paolo
Position:Mergers and acquisitions - Report


Mergers and acquisitions (M&As) have long been used as strategic tools for the development of firms, and are typically seen when a firm intends to grow (which results in a larger market share or improved competitiveness). Certain types of aggregation can also promote the occurrence of internal synergies in a firm. In particular, those firms that engage in M&As can eliminate operational and economic inefficiencies, or introduce improvements such as the increased management effectivenessess, economies of scale, and a greater efficiency of production or distribution, together with improvements in financial management and/or the achievement of fiscal savings, as proposed by Steiner (1975). In the USA, the period during which such transactions were first used as instruments of expansion was 1990-1999 (Henry, 2002). This period corresponds precisely to a period of growth in the granting of company loans that followed the introduction of anti-trust laws and stricter rules in the stock market. These loans made possible the increased use of M&As, not just by businesses that were operating in the U.S. market at the time, but also by firms in other countries that had rather different economic and financial characteristics (see also Kogut and Singh, 1988; Zaheer, (1995). A number of American authors have addressed the accounting and strategic issues that arise from such aggregations, in both the private and public sectors (La Porta, Silanes, Shleifer and Vishny, 1997).

The various different forms of aggregation (Golbe and White, 1987) have developed in a number of juridical forms (fusions, underwritings, etc.), and have not always been profitable for the entities involved. In many cases, the failure has been either a result simply of mistakes in evaluation made by the buyer or of the limited response of the market to the stock quotation of the acquiring and target businesses. A number of empirical studies have addressed the possible operational and financial synergies involved, and the effect of these on the effective return of the buyer in the period that followed the acquisition. The concept of profitability, and the consequent economic and financial performance, is strictly linked with the relationship between the buyer and the asset ; in fact, the more the acquiring company evaluates and quantifies the possible synergies that could flow from the aggregation of two or more companies, the greater the incentive they will have to sustain an outlay that is much higher than the book value of the assets being acquired. In accounting terms, the value of the aggregated company is expressed in terms of the set-up (when positive) that includes the price paid by the buyer (or the 'badwill' if negative). A discretionary view has previously been taken by American companies in two alternative methods of accounting for goodwill ('purchase' or 'pooling of interest'), in the sense that the adoption of one technique in preference to the other can result in a rather different outcome in terms of the status of the current account and the assets concerned. Using the 'pooling of interest' accounting method, each branch of the company is counted in terms of its value on the balance sheet, and the difference between this and the amount paid by the buyer represents a credit or debit in relation to the acquired entity. Under the 'purchase' method, the assets are counted in terms of the effective price paid.

The numerous different methods of evaluating the aggregation are not usually assessed sufficiently rigorously with regard to their return on investment. Indeed, there are many examples of aggregations that were not only unprofitable but also lowered their total value (in the sense of EBIT and EBITDA), and did not result in the economies of scale that might have been expected to flow from the aggregated management of the activities or businesses concerned. A study by KPMG (2001) revealed that within a sample of unquoted U.S. companies, 17% of cross-border acquisitions created and 53% removed value for shareholders (Economist, 1999). Other studies (Ernst & Young, 2000) have described the extent of hostile aggregation. Using a sample of e.g. 4.300 deals that took place within the U.S. market between 1990 and 2000 and were quoted on the NYSE, the findings showed the ways in which the acquisitions were generally less hostile in character than they had been previously (4% of acquisitions were hostile in the 1990s compared with 14% in the 1980s). Given that the number of M&As has increased exponentially, the aim of many authors (e.g. John, 2008; Ravenscroft & Scherer, 1989; Jensen & Ruback, 1983) has been to demonstrate how the value of the target company and the consequent major/minor price paid for it (premium/discount price) can be influenced by and correlated with the market listing of the bidder and target at the point at which the intention to acquire or merge is announced.

Starting from a perspective of short-term shareholder wealth, and the results of previous empirical studies (see Dodd and Ruback, 1977), Martynova and Renneborg (2006), and attempt to verify the possible relationships between the listings of 'target' companies and a number of independent variables, obtained from balance sheets and financial market data from both the acquiring and the acquired entities concerned. The data relate to periods of time immediately before and after the completed M&A. In particular, beginning with a sample of companies listed on the NYSE between 2006-2008, information may be deduced both from the balance sheet (EBIT, EBITDA etc) and from the financial market, from the periods before and after the date of the aggregation (difference between the list prices of the buyer and target before and afterwards, premium/discount price, etc.).

The aim of the research described herein is to provide confirmation for the hypothesis that a relationship exists between (a) the dependent variable (T2-T1), which is the difference between the pre and post listing price of a target company (the numerical difference between the two prices, hereafter the differential pre/post listing), and (b) a series of independent variables that are linked to financial and accounting values.


The research described herein lies within the framework of studies of industrial economics and finance that relate to the profitability and financial/economic suitability of M&As. In particular, in view of the large amount of material available on this subject, we herein attempt to focus on the aggregation of a sample of companies, all of which are listed on the NYSE. Our study follows the American and Anglo-Saxon theory of low-cost aggregation, and the evaluation of a firm's performance pre- and postacquisition by reference to both the financial (market prices before and after aggregation) and balance sheet (revenues, EBIT, EBITDA, total activity etc.) variables of the companies concerned. Some of the studies that have been carried out from an Anglo-Saxon viewpoint have tackled the question of the profitability of M&As, with the intention of verifying whether or not the expectations, as evidenced by the main reimbursements effected as a result of the completed acquisitions, were thought to be satisfactory after a given period (Jensen & Ruback, 1983). In determining the profitability and the success of aggregations, two different types of investigation are commonly conducted:

a) The perspective of 'short-term shareholder wealth' has its focus in the short-term profitability of the shareholders of the acquiring and target companies, and the effect of this on their managers, employees and customers. Details of this approach may be found in Dodd and Ruback (1977), Dodd (1980), Franks, Harris and Titman (1991), and Martynova and Renneborg (2006). At its heart is the hypothesis that the announcement of a proposed aggregation adds information about the expectations of financial markets and of savers, and has a knock-on effect on stock market listings. These authors have compared the different market values with respect to the announcement date t0, in order to determine whether or not the market has acknowledged the aggregation. Some authors (see Schwert, 1996) have also shown the reactions of the acquiring and target companies prior to the announcement date; while others (Eckbo, 1983; Eckbo & Langohr, 1989) have focused instead on the events that took place immediately before and after the announcement.

b) The perspective of 'long-term shareholder wealth' makes use of a longer period of time (greater than 5 years after the announcement date). This frame of reference clearly presents a number of problems that relate to the choice of the statistical methodology used to isolate the effects of aggregational, rather than potential financial and strategic, phenomena, which may have distorted the true profitability in any particular case. Details of this approach may be found in Bradley and Sundaram (2006), and Croci (2007). The empirical evidence is based primarily on the economic and patrimonial aggregates gained from the balance sheet (revenues, EBIT, EBITDA, operating profit, debt, immobilization etc.), and on information traceable to the financial markets (buyer and bidder listings pre- and postaggregation, effective disimbursements, premium/discount price, etc).

3.1. Sample Selection and Variable Definition

We created our sample using the Zephyr Bureau Van Dijk Database, which provides financial information specific to activities in M&A, IPO and venture capital. The sample described herein represents all the acquisition activity of the European companies listed on the NYSE subject to some exclusions (see below). A total of 1.430 companies are defined to be 'European' by the NYSE.. The composition by country is summarised in Table 1.

Of the 1.430 companies, we excluded banks and financial services (activities including equity investment instruments, general finance,...

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