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Firth(1978) summarized result
of study conducted in UK to test whether mergers provide any cooperation
benefits. The data consisted of 150 firms which were quoted on British stock
exchange. The author matched two merging firms with non merging firm belonging
to same industry and same size group to examine if there were any significant
changes that generated returns to firms engaged in merger and non merging
firms. Next the authors examined whether number of merging group changes were
significantly different from non merging changes. Market model proposed by
Sharpe was used to calculate the returns generated by merging and non merging
firms in 24 months prior to merger and 24 months post merger which were examined
using F test. The results showed that there was no significant difference
between two groups. The author concluded that mergers contribute significantly
in increasing size and not rate of returns. 

Falk and Gordon(1979) conducted
a study to elucidate rationale behind business combination decisions. Based on
extensive literature review and interviews with the executives having
experiences in business combinations a list of 21 characteristics analogous to
motivations behind business combinations was prepared. A multiple-motive model
for appraisal of these 21 characteristics was developed wherein these represent
five motivational variables:

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Increase in Liquidity
was represented by large cash reserves, combined ability to raise more funds and
combined ability to borrow at low cost.

Increase in production
economies was represented by reduction in inventory holding cost, reduction in
cyclical fluctuation, production economies and supply assurance.

Improved internal
relations and organization’s design was represented by good labor relations, good
training programs and organizational design & structure.

Increase in firm’s
general competitiveness was represented by avoidance of transaction cost, brand
names, access to technology, good public relations, good government relations,
tax benefit, strategic location and competitive edge

Improved level of
managerial performance was represented by managerial talent, growth in EPS,
growth in return on investment


Study covered 232
firms out of which 187 were US firms and 45 were Canadian firms. The author
uses Guttman’s facet theory for analysis. Results of one way analysis of
variance showed that improved level of managerial performance plays major role
while making business combination decisions and increase in firm’s general
competitive position was not a serious consideration while making similar
decisions. The remaining variables do not differ significantly in their
respective importance. 

Davidson(1981) attempted to
determine the impact of merger on corporate efficiency. Mergers were justified
on grounds of achieving higher profits, attaining personal goals, promoting
corporate growth and abiding the advice of strategic planners. However
proliferation of mergers has raised concern as on whether was it easy to manage
large diversified firms. In this context two different studies are analyzed
each exploring different aspects of merger process.

Study by Wayne I.
Boucher in which views of fourteen prominent individuals were compiled to
determine why firms merge   

Study by Williard
Carlton and his associates which used financial data and objective
characteristics data.

The Boucher study
highlighted that merger decisions are solely made by Chief executive officer
(CEO), predispositions of people involved in merger process have a impact on
merger decisions, increase in personal power was an important motivator in
merger decision, conglomerate mergers provide an opportunity to grow along with
benefits of wider customer base, better market position and skill and trained
human resource. The Carlton study suggested that there was no difference
between the firms that were takeover targets and the firms that were not on the
basis of financial and market characteristics and in fact there exist
similarity in the characteristics of acquiring and acquired firms.

Lubatkin(1983) reported review
of the studies that attempted to find whether mergers provide any real benefit
to the acquiring firms. Literature from field of industrial organization and
strategic management suggests that mergers can lead to three types of synergies
namely technological, pecuniary and diversification. Literature from the field
of finance however provides an opposite point of view. If mergers do not
provide any real benefit then acquiring firm mistake to access the value of
target firm and conflict of interest between shareholders and managers can be
plausible reason for continuation of mergers. If mergers do provide real
benefit then high administrative costs, methodological problems may be some of
the reasons that these benefits are not detected in empirical studies.  

Pazarskis and Christodoulou(1985)
examined the impacts of merger and acquisition on post merger  operating performance of firms. Empirical research
was conducted on 40 Greek firms which were listed on Athens stock exchange and
had executed at least one merger and acquisition in the period 2003-2005. Ten
accounting ratios were used to evaluate the post merger performance namely (1)
Current ratio (2) Day sales in receivable ratio (3) Inventory turnover ratio
(4) Accounts payable turnover ratio (5) Total debt ratio (6) Total asset
turnover ratio (7) Return on total assets (8) Return on equity (9) Gross profit
margin ratio (10) EBITDA margin ratio. The data was collected from the
financial statements of the firms engaged in M&A and other sources.  The authors calculated the ratios over 1 and 2
year before and after M&A separately. Average of the sum of each ratio for
1 and 2 year before M&A was compared with equivalent average for 1 and 2
year after M&A. The results of independent t test revealed that for a
period 2 year before and after M&A only current ratio increased
significantly and total debt ratio decreased significantly all other ratios had
no significant impact on post merger operating performance. Next for 1 year
before and after M&A no accounting ratio changed significantly.        

Pettway and Yamada(1986) analyzed
how wealth of shareholders of both  acquiring and acquired firm was affected and
changes in the risk profile of acquired firms as a consequence of merger,
particularly in Japan. The authors studied 50 listed acquiring firms and 16
listed acquired firms from 1977 to 1984. The daily return data for the period
beginning 210 days before announcement date and ending 30 days before
announcement date for all the firms was used to calculate market model
parameters. Residuals and cumulative average residuals were calculated for each
firm for the entire test period which began 30 days before announcement date
and ends 30 days after effective date. The pattern of cumulative abnormal
returns showed significantly positive swing but in period between announcement
date and effective date there were insignificant abnormal gains and post
execution date abnormal gains declined. The abnormal returns to the shareholder
of acquired firms were small and insignificant. Next the authors drew subsample
of 31 independent mergers from previously taken 50 mergers in order to
ascertain the relationship between cumulative abnormal returns and size.
Mergers in which acquired firm was more than 20% of the size of equity of
acquiring firm were classified as large mergers and otherwise small mergers.
Out of 31 unrelated mergers 21 were large mergers and 10 were small mergers. It
was found that cumulative abnormal returns of large mergers were significantly
greater around announcement date and significantly smaller around effective
date than the returns of small mergers on respective dates. To ascertain
changes in the risk profile of acquiring firm comparison was made between the
alphas and betas in the base period and alphas and betas for the test period;
however no conclusion could be drawn from the comparison.

Lubatkin and O’Neil(1987) through
empirical research examined
relationship between merger strategies and risk. Four merger strategies were
taken into consideration by pooling federal trade commissions with lubatkin’s
scheme namely (1) Single business mergers (2) Vertical mergers (3) Related
mergers (4) Unrelated mergers. Relevant literature was reviewed to establish
foundation of hypotheses. Hypotheses were tested by collecting data about 297
mergers in the time period 1954-1973. Market model was used to ascertain three
components of risk. For pre merger period model parameters were estimated by
regressing data of 60 months beginning 67 months before effective date month
and for the post merger period by regressing data of 60 months beginning 5
months after effective date month. Unsystematic risk difference score,
systematic risk difference score and total risk difference score was calculated
for each firm by subtracting pre merger estimates from post merger estimates.
These difference scores of all the merging firms of same type were averaged and
one way ANOVA was conducted to determine whether across different merger
strategies there exists significant difference in each risk score. Based on the
studied hypotheses, they concluded that irrespective of relatedness between
merging firm’s unsystematic risk rose for acquiring firm after merger and in
case of related mergers systematic risk and total risk falls significantly.
Also, mergers that took place in bull market were less effective in lowering
three components of risk.

Chatterjee and Lubatkin(1988) tried
determining the relationship between nature of merger and systematic risk and
role of leverage in explaining the variance in systematic risk. Hypotheses were
formed on the basis of synthesized results of existing studies. Sample included
mergers from the 1962-1979 that were of at least $10 million in asset value and
were only concentric and conglomerate in nature. Three samples were taken;
first sample consisted of 85 firms, second sample consisted of 120 mergers
including the above mentioned 85 firms and the third sample consisted of 116
mergers from 120 mergers taken above. Subjects were included in each sample
based on different listing criterion. Two different methodologies were adopted
to reach at conclusion. In the first method, market model was used to ascertain
systematic risk. Pre merger (daily /monthly) estimate of systematic risk was
subtracted from post merger (daily/monthly) estimate to ascertain changes in
systematic risk and the difference score of all the bidder firms engaged in
same type of mergers was then averaged. In the second method to control
systematic risk of target firm a hypothesized systematic risk was estimated by
constructing a portfolio of acquiring and acquired firms stocks in which
weights are assigned on the basis of market values of stocks. This hypothesized
systematic risk was subtracted from post merger systematic risk of acquiring
firm. In a similar manner 2 leverage difference scores were also calculated.
Both parametric and non parametric tests were used to determine the impact of merger
on risk. The results showed that in related mergers average post merger
systematic risk of bidder was less than pre merger systematic risk whereas in
unrelated merger only small and insignificant change in unsystematic risk was
observed and leverage could not explain pattern of risk in both related and
unrelated mergers.

Trautwein(1990) synthesized the
results of existing studies to determine theories which identifies the  motives behind mergers. The theories were
divided into seven groups namely (1) Efficiency theory (2)Monopoly theory (3)
Valuation theory (4) Empire building theory (5) Process theory (6) Raider
theory (7) Disturbance theory. Each theory suggested a different rationale for
corporate combinations. The author reviewed relevant literature supporting and
opposing each theory. Next the author considered acquisition mode, entry mode
and integration mode of mergers and evidence from previous studies suggested
that it is effectual to follow efficiency theory while taking these decisions.

Bruton et
al.(1994) tried to understand the post
acquisition performance of financially distressed firms. Empirical research was
conducted on 51 firms that were acquired in between 1979-1987 and suffered decline
in net income and return on investment for two consecutive years prior to
acquisition. The authors also considered a control group of 46 acquisitions of
non financially distressed firms, each acquisition in control group occurred
within 2 years of acquisition of distressed firm. Three explanatory variables
were considered: relatedness between acquiring and acquired firm, prior
acquisition experience of acquiring firm and relative size of acquiring and
acquired firm. If the acquiring firm earned 70% of its revenue from products,
markets or production processes that were related to that of acquired firm then
such acquisitions were classified as related. Experience was measured by number
of acquisition made by acquiring firm in four years prior to acquisition of
firm taken into consideration and size was taken as ratio of revenue of
acquired firm to acquiring firm. Panel of academicians evaluated each
acquisition performance by reviewing all published records, data published by
stock analyst and business writers about acquisitions. The panel assessed each
acquisition on 7 point scale ranging from 1 “very successful” to 7 “very
unsuccessful”. Regression analysis was used to determine relationships. Results
for distressed firms showed that related acquisition outperformed unrelated
acquisitions, firms with prior experience of acquisition showed superior
performance and relative size had no impact on acquisition performance however
no variance in performance of non distressed firms was observed.      

Riordan and Salop(1995) developed
a framework for assessing the efficiency benefits and competitive harms of
vertical mergers in input, output and ancillary market.. Authors argued that
benefits and harms consequent to vertical mergers must be ascertained on the
basis of facts and not on the basis of economic models and for this the
aggrieved must manifest the possibility of loss to the consumers. The authors
opposed the notion that concentration in the input market will cause vertical
mergers to generate substantial efficiency benefits which will exceed any
consumer harm. The authors gave many cases in support of his conception. First,
even in competitive markets vertical mergers can cause consumer harm and
provide efficiency benefits. Second, powerful buyers ensure that suppliers
behave in competitive manner even in highly concentrated input market. Third,
magnitude of efficiency benefits arising from vertical mergers could be small
if the parties in merger fail to meet needs of each other.

Sudarshanam et
al.(1996) examined how returns to
shareholders of both acquiring and acquired firm are affected by the ownership
structure of merged entities and synergistic benefits created by mergers. The
sample consisted of 429 mergers that occurred in UK in between 1980-1990. The
authors reviewed previous studies relating to mergers and suggested that
mergers create operating, financial and managerial synergies. Managers are
motivated to take combination decisions either to maximize their own utility or
to create value for the shareholders. The authors suggested that the ownership
structure of bidding and target firm determines the extent of gains in mergers and
their distribution between the shareholders of both the firm. The authors
employed two market models to ascertain gains generated by mergers. Abnormal
returns were estimated for the test period of -40 to +40 days around event date
.Average abnormal returns were then cumulated which were tested for statistical
significance. To study the impact of synergy and ownership structure regression
analysis was performed. The synergy variables were represented by:

Industry relatedness

Relative market to book
ratio of bidder to target

Mismatch between
relative liquidity and growth opportunities of bidder and target

Absolute difference in
gearing between bidder and target 

Relative market value
of equity 

  Ownership variables were represented by:

Director’s shareholding
in bidder

Director’s shareholding
in target

Large shareholding in

Large shareholding in

Bidder’s toehold in
target at bid announcement

 In addition to this 5 control variables were
also considered. The pattern of cumulative abnormal returns showed that mergers
created wealth for the shareholders of target firms. The result of regression
analysis showed that post merger gains to shareholders of both firms were
influenced more by financial synergy than managerial and operating synergy.
Weak relationship was found between managerial shareholding and returns to
shareholders of target and bidding firm but returns to the shareholders target
firm falls because of bidders’ toehold and large shareholding. These results
were however not stable over time.

Dickerson et
al.(1977) in their research examined the
impact of acquisitions on the performance of acquiring company and whether
acquisition growth and internal growth generate different returns for the
acquiring company . The sample consisted of 2914 companies of UK. The relevant
data was collected for firms under consideration for the period 1948-1977. The
authors developed a model to capture the impact of acquisitions on
profitability where firm’s profitability was taken as a function of firm’s
size, leverage, growth in net assets, company specific factors and time
specific factors. The authors adopted two different methods to ascertain the
impact of acquisition. Firstly, the authors took a dummy variable which
measured difference in average profitability of merged and non merged firms.
The results of regression analysis showed fall in rate of returns of merged
firms. Secondly, the authors divided total growth into acquisition growth and
internal growth to ascertain their impact separately on firm’s performance. The
results of regression analysis showed a non linear relationship between size
and profitability, negative relationship between debt and profitability,
positive relationship between growth rates and profitability and lastly
negative relationship between acquisition growth and profitability. The authors
also measured sensitivity of results by subjecting them to number of changes in
constituents of profit, number and size of firms in sample and measures of
leverage but results were not stable across all the changes.             

Barragato and Markelevich(2003)
analyzed the relationship between motive for a business combination and quality
of earnings post business combination. The authors based their analysis on 907
mergers of US companies that occurred in between 1987-1999. The authors
reviewed previous articles dealing with motives of business combinations and
identified synergy and agency as two major motives. Business combinations in
interest of shareholders are synergy motivated and those which are in interest
of managers are agency motivated. The authors’ classified mergers as synergy
motivated if the stock market reacts positively to the announcement otherwise
the merger was considered to be agency motivated. The authors took test period
of 5 days before and after announcement to estimate market’s reaction.41%
mergers were classified as synergy driven and 41% were classified as agency
driven.  Earning stream was considered of
high quality if it was more closely associated with future operating cash
flows. The authors regressed next year’s cash flow from operations on current
cash flow from operations and total accruals to determine quality of earnings.
The results of regression analysis showed that synergy motivated mergers
generated high quality earnings.

Sung and Gort(2006) in
their study compared the pre merger
and post merger performance of merging companies and also made comparison
between the performance of merging firms and non merging firms. The authors
took into consideration 38 US telecommunication companies of which 13 were
merged companies and 25 were non merged companies. The pertinent data was
collected for 1991-2000. The authors estimated total factor profitability (TFP)
for both merged and non merged firms for the time period under consideration
and then compared average annual growth rates in TFP for both the groups in pre
and post merger periods. The average annual growth rates in TFP of non merged
firms increased however no change was observed for merged firms. Next, the
authors carried regression analysis to ascertain the effects of different
variables on TFP. The results showed that mergers do not impact productivity of
merging firms in positive manner. To determine the impact of mergers on costs
of merging firms the authors added merger as an additional explanatory variable
in cost functions. The results of regression analysis showed increase in total
cost post merger. Lastly the authors measured the immediate and long term
impact of mergers on shareholders by calculating capital gains and average
returns per share. The results showed that the shareholders of the bidders suffered
losses in both short and long term.            



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