16.3 M&A
(H. Singh and Montgomery 1987)
Variable of interest:
DV: cumulative portfolio abnormal returns
IV: relatedness between acquirer and target
Similarity is the presence of technological or product-market relationships between acquirer and target
Data: 106 mergers (1975 - 1980)
Related firms create more value when merging
Variable of interest:
DV: merger dollar gains
IV: product-market fit (between acquirer and target)
Similarity is the presence of similar target markets, similar products, or both.
Data: 218 mergers (1962 - 1983)
Related firms create more value when merging
Variable of interest:
DV: ROA
IV: Similarity in R&D, capital, and administrative intensities
Complementary is differences between acquirers and targets in R&D, capital, debt, and administrative intensity
R&D complementarity boosted unrelated acquisitions.
(Datta, Pinches, and Narayanan 1992)
Variable of interest:
DV: wealth effects
IV: # of bids, type of financing, and acquisition
Similarity is overlap in served markets
Data: 41 primary studies
Similar firms create more value when merging
Variable of interest:
DV: ROA
IV: similarity in market coverage, operational efficiency, marketing activity, client mix, and risk propensity
Difference between acquirers and targets was based on a distance metric
Sample: 46 horizontal mergers (banking)
Differences impede horizontal banking merger success.
(Healy, Palepu, and Ruback 1997)
Returns to buyer’s shareholders are connected with managers’ equity stakes.
Leveraged buyouts (LBOs) that align management and shareholder interests provide value for purchasers.
(Agrawal, Jaffe, and Mandelker 1992; Loughran and Vijh 1997)
Cash deals are more popular with investors than stock-financed deals. The bad signaling effect of equity financing suggests managers may offer overvalued stock. This unfavorable stock market reaction to stock financing is permanent.
Negative returns for acquirers who paid with equity five years post-takeover.
Variable of interest:
DV: ROA
IV: product-market relatedness and resource complementarities
Complementarity is the presence of related assets
Data: 24 mergers (case study)
Resource complementarities contribute to merging success
Excess cash acquisitions fail. Announcement period returns are negatively associated with an acquirer’s cash.
A cash reserve eliminates external borrowing. When managers are shielded from the external market, they make irrational investment decisions.
(Larsson and Finkelstein 1999)
Variable of interest
DV: Synergy realization
IV: combination potential, degree of integration achieved, lack of employee resistance
Data: 112 mergers (case study)
Complementary operations increase synergy, especially with organizational integration.
- there is evidence for underperformance after M&A performance
(M. L. Mitchell and Stafford 2000)
- Small acquirers see favorable returns three years post-acquisition.
Undervalued acquirers with high book-to-market ratios (value’ acquirers) have favorable long-run returns, while overvalued acquirers with low book-to-market ratios have negative returns.
The stock market extrapolates management’s ability to make solid purchases from the company’s finances. “Glamour” acquirers’ managers are generally overconfident in their ability to handle an acquisition, and their actions aren’t rigorously checked. Value’ acquirers, rigorously scrutinized by other stakeholders, are more cautious in appraising possible targets, leading to wiser decisions.
(Megginson, Morgan, and Nail 2004)
Business similarity between merging firms is linked with positive stock performance.
Divestitures or spin-offs that dispose of non-core assets or operating divisions boost stockholder value.
(Moeller, Schlingemann, and Stulz 2004)
- Small acquirers have larger announcement period returns, regardless of target ownership (public/private).
(Fuller, Netter, and Stegemoller 2002; Conn et al. 2005)
Buyer shareholders enjoyed big gains when the target was a privately owned corporation or a parent-controlled subsidiary.
The bidder benefits from the illiquidity discount and enhanced information sharing from concentrated ownership.
Bidders using stock transfers and other non-cash means did not underperform and saw positive stock market reactions. Private target managers, who are expected to become major stakeholders in the new business, have a greater motive to supervise the bidder’s management, which provides value for the bidder. Deferred tax obligations in a stock offer may lead target ownership to accept a lower price. This leads to increased shareholder returns.
A lack of awareness around private bids makes it easier for bidders to abandon discussions, reducing hubris-driven judgments. The stock market favors glamour’ businesses bidding for private targets.
(Moeller, Schlingemann, and Stulz 2005)
- When inorganic growth is no longer sustainable, serial acquirers with high valuations lose money on their purchases.
(Cosh, Guest, and Hughes 2006)
- CEO ownership increased long-term returns.
(Swaminathan, Murshed, and Hulland 2008) found that when merging organizations have poor strategic emphasis alignment, diversity improves value. In contrast, when merging organizations have strong strategic emphasis alignment, value is enhanced when the merger goal is consolidation.
For a summary of M&A research in marketing up until 2008 (see table 1, p. 34)
Contributions:
Strategic emphasis alignment is an important variable in merger value creation
Both resource similarity and resource complementarity create value (but under different merger motives)
marketing resources (e..g, advertising relative to R&D) affect M&A value creation.
Merger motives (p. 40):
Consolidation: to gain power by combining two firms with similar products and serving similar markets
related diversification: two firms that operate in completely non-overlapping businesses.
unrelated diversification: two firms in closely related industries
“related diversification in which firms gain access to and acquire a related technology”
“related diversification in which firms acquire a related product for product line filling”
Data: 206 M&A (electronics, chemicals, foods).
Method: event studies
Strategic emphasis was operationalized by substracting the firm’s R&D expenditures from its advertising expenditures and dividing it by the total assets of the firm in the year preceding the merger (following (Mizik and Jacobson 2003))
Strategic emphasis alignment: absolute value fo the difference between the acquirer strategic emphasis and that of the target.
(D. R. King, Slotegraaf, and Kesner 2008) see Research and Development
(Chari, Ouimet, and Tesar 2009)
Acquirers of domestic targets experience bigger short- and long-term wealth benefits than offshore acquirers. Deals that diversify across borders perform poorly. Returns are higher when the target’s domestic product and financial markets move independently of the acquirer’s own nation. Stock markets favor developed market acquirers in emerging markets.
As developing market spreads grow, acquirer returns rise. When majority ownership is transferred, the acquirer, target, and acquirer’s shareholders all enjoy stronger profits, especially in R&D- and brand-intensive businesses where intellectual assets are significant.
(Bouwman, Fuller, and Nain 2009)
In terms of two- and three-year buy-and-hold returns, bull market acquisitions underperform bear market acquisitions.
Managers suffer from hubris during market upswings and overestimate synergies and profits. When the market is pessimistic, managers make more cautious decisions, thus purchases are motivated by realistic prospects of beneficial synergies.
(Swaminathan and Moorman 2009)
Contribution:
alliance announcements create value for firm
When network efficiency and density are moderate, they have the most favorable influence.
Network reputation and network centrality have no effect
marketing alliance capability (firm’s ability to management a network of previous marketing alliances), positively influence value creation.
Network features:
Network centrality: whether the company has partnerships (# of firms with which a firm is directly connected)
Network efficiency: The company’s network offers new capabilities (the degree to which the firm’s network of alliances involves firms that possess non-redundant knowledge, skills, and capabilities)
Network density: the firm’s network involves interconnections among firms (the degree of interconnectedness among various actors in a network)
Network reputation: the firm has a strong reputation (aggregate-level quality ascribed to firms in a firm’s network).
Marketing alliance capability: The company may handle marketing relationships
To construct the network variables, they were used from the period of 5 years before, but other research use 7 years (Gulati and Gargiulo 1999; Schilling and Phelps 2007)
How firm networks influence firm abnormal returns?
Networks multiply alliance benefits
Networks facilitate alliance compliance
Networks signal firms and alliance quality
Control variables:
Following (Shantanu Dutta, Narasimhan, and Rajiv 1999), installed base of customers (firm sales), firm resources devoted to building customer relationships (firm receivables), marketing expenditures (firm selling, general, and administrative expenses), firm advertising expenditures. Then, add technical know-how (R&D expenditure). All of these variables use Koyck lag function, then combine under principal components analysis to avoid multicollinearity.
firm alliance experience
size of alliance partners (ratio of market cap of the firm to the partner)
Intra industry alliances vs. inter industry alliances (following (Rindfleisch and Moorman 2001))
Repeat partnering
partner network characteristics (same network variables)
Selection model and value creation model because partnership may be based on referrals (following (Verbeek and Nijman 1992)
Umashankar, Bahadir, and Bharadwaj (2021) found that M&A decreases customer satisfaction that cannibalize firm value despite potential efficiencies (due to a shift by executives from customers attention to financial issues). The presence of marketing experts in upper echelons can mitigate this negative effect. Customer dissatisfaction with M&As might offset any synergy and efficiency advantages.