Advances in Mergers and Acquisitions: Volume 1


Table of contents

(11 chapters)

While the bulk of the research on the financial performance of mergers and acquisitions has focused on stock returns around the merger announcement, a surprisingly, large set of papers has also examined long-run stock returns following acquisitions. We review this literature, concluding that long-run performance is negative following mergers, though performance is non-negative (and perhaps even positive) following tender offers. However, the effects of both methodology (see Lyon, Barber & Tsai, 1999) and chance (see Fama, 1998) may modify this conclusion. Two explanations of under performance (speed of price-adjustment and EPS myopia) are not supported by the data, while two other explanations (method of payment and performance extrapolation) receive greater support.

This chapter synthesises theoretical and empirical perspectives on cultural compatibility within cross-border acquisitions, drawing on both the organisational and national culture streams of acquisitions literature. The impact of cultural compatibility on subsequent acquisition performance is seen to revolve around the form of post-acquisition integration and the relative attractiveness of the acquirer's culture. For the latter, there is some evidence that attitudes towards participation, formality and risk may have a particular importance, although the relative influence between organisational and national culture remains unclear. Avenues for future research are indicated.

There are a variety of monitoring and control mechanisms to resolve the agency conflict between shareholders and their agents, the managers. Given the centrality of the shareholder wealth maximisation goal in corporate finance, the function of these mechanisms is to ensure that managers pursue that goal. These mechanisms include: an independent board, outside block shareholdings including institutional shareholders, managerial ownership and incentives, lenders, the managerial labour market and the market for corporate control. We explore the inter-dependency of these control mechanisms and whether and how they complement, or substitute for, one another. The role of the market for corporate control, including proxy contests and outright takeovers, in resolving agency conflicts, the impediments to takeovers and their effectiveness are reviewed. We seek to explain the well-documented failure of acquirers to create value, in terms of the ineffectiveness of the corporate governance system in acquiring companies.

This chapter examines the interrelationships among pre-merger acquisition strategy, target resistance and post-merger integration and the effects of these interrelationships on post-merger performance. Perspectives from financial and strategic management theory are combined to suggest that an interaction effect of pre-merger and post-merger activities more fully explains merged firm performance, especially in cases in which the acquiring'firm is related to the target. Relatedness between acquiring and target firms is more likely to lead to operating synergy, which may increase performance. However, potential positive effects from synergy are likely to be offset by resistance from target firm executives, which may lead to premium-increasing tactics, such as bidder solicitation or holding out for a higher price, or, in the post-merger stage, integration difficulties.

In this chapter we examine the relation between managerial ownership and the announcement returns of 93 Swedish risk-reducing acquisitions, completed over the 1980–1995 period. The evidence shows that there are not distinct governance characteristics associated with bidders' risk-reducing acquisitions. Our results indicate that firms engage in diversifying acquisitions at the expense of shareholders' wealth when managers have no equity stakes on the bidder This result is consistent with the view that risk-reducing acquisitions are motivated by managers' need to diversify the risk associated with their human capital. This result suggests that risk-reducing acquisitions occur when managers' firm-specific human capital is at risk. Managers elect corporate risk-reducing activities as a means of reducing the risk of their human capital. Risk-reducing acquisitions, however, by firms where managers hold equity stakes increase firm value. This result suggests that managerial owners make risk-reducing acquisitions when they have identified potential corporate gains from risk-reduction. Simultaneous equation estimations provide additional evidence suggesting that managerial ownership affects bidder's shareholder returns, while there is no evidence of reverse causality.

Research on mergers and acquisitions focuses almost exclusively on manufacturing and retail services firms. Professional services firms (PSFs) have been largely ignored, yet they present a distinctive managerial challenge. In PSFs, the key value-creating resources (technical knowledge and client relationships) are often proprietary to individuals, who may enjoy considerable operational autonomy within their firm. The challenge for senior managers is to persuade professional staff to remain with the firm and to share these resources with their merger partner colleagues. This chapter reports the results of a series of inductive, in-depth, longitudinal case studies of both mergers and acquisitions in the context of PSFs. It identifies an undirected model of organizational integration, termed the High School Dance model, where managerial action is highly constrained and where the pace and extent of integration is determined by professional staff throughout the combining firms. The study questions some of the fundamental assumptions within the mergers and acquisitions literature concerning the role of managers and the response of employees. It demonstrates that, in both mergers and acquisitions, the pace and extent of integration is determined by professional staff throughout both of the combining PSFs. In this context, managerial action is highly constrained, regardless of the formal authority structure, as ultimate power resides with those who embody the key intangible resources.

Publication date
Book series
Advances in Mergers and Acquisitions
Series copyright holder
Emerald Publishing Limited
Book series ISSN