Sources of value creation and destruction in horizontal mergers and acquisitions

2019 ◽  
Vol 45 (10/11) ◽  
pp. 1398-1415
Author(s):  
Mohammed Ibrahimi ◽  
Hicham Meghouar
Keyword(s):  
Mergers And Acquisitions ◽  
Value Creation ◽  
Financial Risk ◽  
Abnormal Returns ◽  
Strategy Management ◽  
Horizontal Mergers ◽  
Accounting Data ◽  
Content Type ◽  
Debt Capacity

Purpose The purpose of this paper is to investigate the determiners to create and destroy value in horizontal mergers and acquisitions (M&A) using accounting indicators supposed to influence the new entity’s value. Design/methodology/approach Using a sample of 90 French listed companies and stepwise regression method, the authors test eight accounting indicators supposed to influence the new entity’s value. Findings To create value after a horizontal M&A, it is necessary to concentrate on turnover and the restructuring of charges without neglecting the control of debt capacity. To avoid destroying value after a horizontal M&A, it is necessary to concentrate on the control of debt capacity and restructuring of charges in order to reduce financial charges and financial risk. Horizontal M&A also create value through the reduction of investment costs and through tax optimization. Research limitations/implications This paper is different from other contributions in that the majority of existing literature concerning the sources of value creation in M&A has been based on abnormal returns or microeconomic data. This paper analyzes accounting data that are likely to be influenced over the long term by corporate decision making. These kinds of decisions influence the firm’s value as well as the long-term gains that industrial investors may hope to obtain. Originality/value This study makes a significant contribution to the existing literature insofar as it seeks to divide the sources of value creation into three categories: sales synergy, cost synergies and hybrid synergies. To the best of the authors’ knowledge, this is also the first study to provide explanations from companies’ accounting data, which can lead managers to a greater vision of post-merger strategy management, reinforcing the mechanism for value creation.

The effect of ESG on value creation from mergers and acquisitions. What changed during the COVID-19 pandemic?

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Ioannis Tampakoudis ◽  
Athanasios Noulas ◽  
Nikolaos Kiosses ◽  
George Drogalas
Keyword(s):  
Mergers And Acquisitions ◽  
Value Creation ◽  
Shareholder Value ◽  
Abnormal Returns ◽  
Shareholder Wealth ◽  
Data Availability ◽  
Cross Sectional ◽  
Exogenous Shock ◽  
Content Type ◽  
Sustainability Disclosure

Purpose The purpose of this study is to investigate the relationship between environmental, social and governance (ESG) performance and shareholder wealth in the context of mergers and acquisitions (M&As) before and during the coronavirus (COVID-19) pandemic. Design/methodology/approach This paper uses a sample of 889 completed M&As announced by US firms between 1 January 2018 and 31 July 2020. Announcement abnormal returns are estimated using an event study methodology and the relation of ESG performance to shareholder value creation is tested with univariate and multivariate cross-sectional regressions. Findings This study provides evidence for a significant negative value effect of ESG performance for the shareholders of acquiring firms during the entire sample period. The negative effect appears to be stronger, as the onset of the COVID-19 crisis. This suggests that, during the pandemic-driven economic turmoil, the costs of sustainability activities outweigh any possible gains, providing evidence in support of the overinvestment hypothesis. Research limitations/implications The results of the study have important implications for firms, investors and policymakers. Firms should be more cautious with regard to extensive investments in ESG activities, particularly during economic turmoil. For shareholders, the results suggest that ESG engagement is not a resilience factor in an exogenous shock such as the COVID-19 pandemic. In terms of policymaking, the sustainability disclosure framework should remain voluntary allowing firms to report material ESG-related issues. The main limitation of the study is related to data availability regarding ESG performance. Originality/value To the best of the knowledge, this is the first study that investigates the effect of ESG performance on shareholder value in the market for corporate control before and during the COVID-19 pandemic.

Value creation through cross-border mergers and acquisitions by the Indian pharmaceutical firms

2014 ◽  
Vol 7 (1) ◽  
pp. 49-63 ◽  
Author(s):  
Ritu Srivastava ◽  
Ajai Prakash
Keyword(s):  
Pharmaceutical Industry ◽  
Mergers And Acquisitions ◽  
Value Creation ◽  
Abnormal Returns ◽  
Content Type ◽  
Mean Values ◽  
Pharmaceutical Firms ◽  
Cross Border ◽  
Ex Ante ◽  
The Mean

Purpose – Cross-border mergers and acquisitions (M&A) have given the opportunity to the emerging market multinationals to add value while implementing the strategy of internationalization. The Indian pharmaceutical firms are also adopting this strategy and the purpose of this paper is to determine the evidence of value creation for their international M&A activity. Design/methodology/approach – In total, 30 cross-border M&A are examined for value addition through accounting (PAT as percentage of net worth, PAT as percentage of capital employed, research and development (R&D) expenses as percentage of operating expenses) and shareholder return (cumulative abnormal returns) measures of the acquirer firm ex-ante and ex-post M&A. The difference in mean values of the variables after the M&A event is determined through Student's t-test. The time horizon selected for accounting variables was five years and the abnormal stock market returns were calculated using domestic market model with the event window being 40 days. Findings – The results indicate no statistically significant difference in the mean values of all the measures except R&D expenses as percentage of operating expenses for the acquirer Indian firms before and after the M&A event. The mean values of abnormal returns were less than those before the M&A activity. Research limitations/implications – The study does not include a control group of Indian firms engaged wholly in domestic M&A activity or those firms who have not merged or acquired at all. Practical implications – The study may point out toward no significant ex-ante value creation in terms of the selected profit measures but it suggests the probability of the strategy being adopted as a solution to problems like the transfer of tacit knowledge in case of technology led competitive advantages in the pharmaceutical industry and the rise of R&D activity. Originality/value – The Indian pharmaceutical industry has been experiencing waves of international M&A activity since 2005 after the implementation of Product patent Act, 2005. However, little research has been done on the sector to understand the value creating implications of such corporate strategic decisions.

Financial institutions mergers: a strategy choice of wealth maximisation and economic value

2020 ◽  
Vol 12 (4) ◽  
pp. 495-529
Author(s):  
Mohamad Hassan ◽  
Evangelos Giouvris
Keyword(s):  
Credit Risk ◽  
Event Study ◽  
Financial Institutions ◽  
Value Creation ◽  
Economic Value ◽  
Abnormal Returns ◽  
Study Analysis ◽  
Event Window ◽  
Content Type ◽  
Merger Announcement

Purpose This study Investigates Shareholders' value adjustment in response to financial institutions (FIs) merger announcements in the immediate event window and in the extended event window. This study also investigates accounting measures performance, comparison of post-merger to pre-merger, including several cash flow measures and not just profitability measures, as the empirical literature review suggests. Finally, the authors examine FIs mergers orientations of diversification and focus create more value for shareholders (in the immediate announcement window and several months afterward) and/or generates better cash flows, profitability and less credit risk. Design/methodology/approach This study examines FIs merger effect on bidders’ shareholder’s value and on their observed performance. This examination deploys three techniques simultaneously: a) an event study analysis, to estimate and calculate abnormal returns (ARs) and cumulative abnormal returns (CARs) in the narrow windows of the merger announcement, b) buy and hold event study analysis, to estimate ARs in the wider window of the event, +50 to +230 days after the merger announcement and c) an observed performance analysis, of financial and capital efficiency measures before and after the merger announcement; return on equity, liquidity, cost to income ratio, capital to total assets ratio, net loans to total loans, credit risk, loans to deposits ratio, other expenses and total assets, economic value addition, weighted average cost of capital and return on invested capital. Deal criteria of value, mega-deals, strategic orientation (as in Ansoff (1980) growth strategies), acquiring bank size and payment method are set as individually as control variables. Findings Results show that FIs mergers destroy share value for the bidding firms pursuing a market penetration strategy. Market development and product development strategies enable shareholders’ value creation in short and long horizons. Diversification strategies do not influence bidding shareholders’ value. Local bank to bank mergers create shareholders’ value and enhance liquidity and economic value in the short run. Bank to bank cross border mergers create value for bidders’ in the long term but are associated with high costs and higher risks. Originality/value A significant advancement over the current literature is in assessing mergers, not only for bank bidders but also for the three pillars FIs of the financial sector; banks, real-estate companies and investment companies mergers. It is an improvement over current finance literature because it deploys two different strategies in the analysis. At a univariate level, shareholder value creation and market reaction to merger announcements are examined over short (−5 or +5 days) and long (+230 days) windows of the event. Followed by regressing, the resultant CARs and BHARs over financial performance variables at the multivariate level.

Announced versus canceled bank mergers and acquisitions

2016 ◽  
Vol 17 (5) ◽  
pp. 510-544 ◽  
Author(s):  
Armin Varmaz ◽  
Jonas Laibner
Keyword(s):  
Mergers And Acquisitions ◽  
Shareholder Value ◽  
Abnormal Returns ◽  
Bank Mergers ◽  
Cross Sectional ◽  
Market Reactions ◽  
Content Type ◽  
European Bank ◽  
Long Time ◽  
Loan Losses

Purpose This paper aims to empirically analyze the success of European bank mergers and acquisitions (M&As) by an analysis of the shareholder value implications of stock market reactions to announced and canceled M&As in the period from 1999 to 2015. Design/methodology/approach The analysis of a sample of 467 announced and 54 canceled European bank M&As is conducted using event study methodology. The determinants of the shareholder value creations in M&A are observed in cross-sectional regressions. The likelihood of M&As being canceled is estimated in logit regressions. Findings The paper finds that European bank M&As have not been successful in terms of shareholder value creation for acquiring banks, whereas targets experienced significant value gains. Abnormal returns for bidders and targets exhibit the same characteristics upon the announcement of M&As that are canceled at a later date, whereas the results for transaction cancelations deviate. Targets experience negative abnormal returns at a larger size than upon the transaction announcement. The findings for bidders are striking, as they destroy shareholder value upon the transaction cancelation, also, consequently they suffer twice. In particular, banks with higher profitability, higher efficiency and lower liquidity experience negative abnormal returns around the announcement dates. Negative abnormal returns prior to the transaction announcement and provision for loan losses increase significantly the likelihood of M&A cancelation. Originality/value This paper contributes to the literature expanding existing analyses to the shareholder value implications of canceled European bank M&As in a 17-year long time period. The findings reveal the destructive characteristics of canceled bank M&As and provide innovative insights into European capital market reaction to canceled M&As.

Determinants of stock market reaction to cross-border acquisitions: evidence from emerging economies

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Samta Jain ◽  
Smita Kashiramka ◽  
P. K. Jain
Keyword(s):  
Emerging Economies ◽  
Value Creation ◽  
Global Economy ◽  
Emerging Market ◽  
Research Work ◽  
Abnormal Returns ◽  
Content Type ◽  
Cross Border ◽  
Country Level ◽  
Acquiring Firms

PurposeThe global economy has witnessed an exponential increase in cross-border acquisitions (CBAs) by emerging market companies (EMCs), demanding a relook at their internationalization strategy. The purpose of the study is to investigate whether the announcement of CBAs by EMCs creates value for the equity-holders of acquiring firms and identify factors affecting the valuation of acquiring companies.Design/methodology/approachThe paper investigates the announcement impact of CBAs of CNX Nifty 500 Indian and SSE 380 Chinese companies. The event study analysis of 553 Indian and 125 Chinese acquisitions supports the contention that CBAs are indeed a strategic choice of EMCs for value creation.FindingsCBAs generate positive and statistically significant abnormal returns for shareholders of both Indian and Chinese acquirers. The markets, however, differ in terms of their motivations; country-level factors have been observed to exert significant influence on the returns of Indian acquirers. Indian companies experience larger value creation on acquiring firms established in developed, institutionally closer and/or economically distant markets. The findings support the asset-seeking motive of Indian companies.Originality/valueThe research work contributes to the evolving stream of CBAs literature with a focus on the globalization strategies of EMCs. The present study is a modest attempt to lay the foundation for a new theoretical framework (asset-seeking perspective) of overseas acquisitions from emerging economies. The existing studies on emerging economies have emphasized, in isolation, either Indian CBAs or international acquisitions by Chinese firms. Being so, the study is unique and original in the sense that it is a comparative study of India and China.

Financial characteristics of takeover targets: a French empirical evidence

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Hicham Meghouar ◽  
Mohammed Ibrahimi
Keyword(s):  
Empirical Studies ◽  
Abnormal Returns ◽  
Control Group ◽  
Subprime Mortgage ◽  
Content Type ◽  
Financial Variables ◽  
Target Firms ◽  
Debt Capacity ◽  
Financial Characteristics ◽  
Available Information

PurposeThe purpose of this research is to highlight the financial characteristics of large French targets which were subject to takeovers during the period 2001–2007 and thereafter deduct the implicit motivations of acquirers.Design/methodology/approachUsing a global sample of 128 French listed companies (64 targets and 64 non-targets), the authors carried out Wilcoxon–Mann–Whitney testing and logistic regression in order to test nine hypotheses likely to discriminate between the two categories of companies (targets and non-targets).FindingsAccording to the results, target firms are more unbalanced in terms of growth resources and less rich in liquidity than their peers. They have unused debt capacity, offer greater opportunities for growth than firms in the control group and present low levels of value creation.Research limitations/implicationsThe main limitation of this study is regarding the sample size, limited by the exclusive use of large firms (deals of over $100m). The scope of this research could be broadened in future by including medium-sized companies.Practical implicationsThe authors believe that their results have two major implications. First, they enable market investors to achieve abnormal returns by investing in predicted targets through a portfolio of high takeover probability firms. Second, CEO of companies that are potentially targeted can assess their takeover likelihood in order to act and to manage such a situation for the benefit of their shareholders.Originality/valueThis research concerns the last wave of takeover prior to the subprime-mortgage financial crisis (2001–2007), a period that has not been sufficiently covered in empirical studies. This research contributes to the existing literature in two main respects. First, the results of this study improve our understanding of motivations for takeovers, particularly in the French context. Second, the introduction of new accounting and financial variables, not previously tested in the literature, enriches the available information concerning the profile of takeover targets.

Do mergers and acquisitions create value?

2019 ◽  
Vol 36 (2) ◽  
pp. 240-264
Author(s):  
Krishna Reddy ◽  
Muhammad Qamar ◽  
Noel Yahanpath
Keyword(s):  
Mergers And Acquisitions ◽  
Positive Impact ◽  
Abnormal Returns ◽  
Ordinary Least Squares ◽  
Content Type ◽  
Developed Economies ◽  
Acquiring Firms ◽  
Significance Levels ◽  
Chinese Markets ◽  
Specific Factors

Purpose The purpose of this paper is to study whether mergers and acquisitions (M&As) create value in Indian and Chinese markets. Design/methodology/approach The authors study abnormal returns (AR) created by the acquiring firms in Indian and Chinese markets relating to M&A announcements, using the following three different statistical methods: i.e. mean, market and ordinary least squares adjusted return models. Findings On average, M&A announcements do not create value for the firms in Chinese and Indian economies. For the mean model, M&As create value for Chinese firms, whereas for the Indian firms no such value is created for the same event windows. The regression results showed that debt has a positive impact on the AR and cumulative average abnormal returns at 1, 5 and 10 per cent significance levels, respectively. Research limitations/implications This study suggests increasing the sample size and period and using the instrumental variables regression to ensure the estimator’s impartiality, consistency and efficiency. With the investigative period surrounding a financial crisis, the estimators may have omitted bias. Originality/value Multiple methods used in this paper made it possible to capture the level of method variance in the AR, which is unusual in the Chinese and Indian context. Hence, the current study provides local knowledge and further strengthens the literature about M&As. The authors also regress AR with firm-specific factors, the consideration of which is scarce in the previous literature. Furthermore, much of what the authors know about M&A is relevant to developed economies.

Trade-off between value creation and value appropriation?

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Cleo Schmitt Silveira ◽  
Marta Olivia Rovedder de Oliveira ◽  
Rodrigo Heldt ◽  
Fernando Bins Luce
Keyword(s):  
Value Creation ◽  
Generalized Method Of Moments ◽  
Impulse Response Functions ◽  
Value Appropriation ◽  
Trade Off ◽  
Content Type ◽  
Short And Long Term ◽  
Long Term Performance ◽  
Term Performance

PurposeManagers face the challenge of balancing resources needed to support value creation and value appropriation. In this study the authors analyze the impacts of innovation investments (i.e. value creation: VC) on advertising expenditures (i.e. value appropriation: VA), and vice versa, and verify the effects of these options on short- and long-term performance.Design/methodology/approachThe effects of these two activities on short- and long-term performance were analyzed observing a panel of 4,090 companies of Standard and Poor's Compustat database from a 40-year period. The authors adopted the panel vector autoregressive (VAR) approach, using the generalized method of moments (GMM).FindingsAlthough there is a trade-off between the strategic emphases on creating and appropriating value, there is also a synergy between them. The results from the impulse response functions support the argument for a virtuous business circle: companies that choose to intensify their investments in R&D tend to increase advertising expenditures, and vice versa.Practical implicationsManagers, rather than having to deal with a trade-off between allocating resources either on VC or VA activities, can capitalize on synergetic benefits resulting from the interaction among them.Originality/valueThe relationship between the VC and VA activities transcends the trade-off imposed by resource restrictions, since the interaction between them creates additional benefits afforded by the synergy of these activities.

Bank caution will make Russian firms draw on own funds

2017 ◽  
Keyword(s):  
Economic Growth ◽  
Mergers And Acquisitions ◽  
Economic Recovery ◽  
Productive Capacity ◽  
Fixed Asset ◽  
Content Type ◽  
Domestic Capital ◽  
Investment Rates ◽  
Growth Prospects

Subject Financing sources for Russian companies. Significance Low investment rates in the last three years have led to substantial fixed asset deterioration. Russian companies are trying to make better use of existing assets instead of renewing productive capacity, and the main source of investment is their own funds. Impacts As EU and US sanctions persist, Russia will strive to boost domestic capital markets. Prolonged low investment will restrict economic growth prospects for the medium-to-long term. Insufficient investment will limit productivity and undermine product competitiveness. Signs of economic recovery may boost mergers and acquisitions.

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