Article Detail

Measuring the Economic Gains of Mergers and Acquisitions: Is it Time for a Change?

Journal 32: Applied Finance

Antonios Antoniou, Philippe Arbour, Huainan Zhao

In this paper we review the methods of measuring the economic gains of mergers and acquisitions (M&A). We show that the widely employed event study methodology, whether for short or long event windows, has failed to provide meaningful insight and usable lessons regarding the central question of whether mergers and acquisitions create value. We believe the right way to assess the success and therefore the desirability of M&A is through a thorough analysis of company fundamentals. This will require examining smaller samples of transactions with similar characteristics.

The development of the market for mergers and acquisitions (M&A) has gone hand in hand with the emergence of world capital markets. The corporate landscape is perpetually being altered by M&A transactions. On a macroeconomic level, mergers come in waves, with one of the most memorable waves gaining momentum during the early 1990s and crashing shortly after the turn of the millennium. During this period, deregulation, a booming world economy, strong consumer and investor confidence, combined with rich stock market valuations propelled the economic significance of M&A to new heights. Indeed, during the late 1990s, the size, volume, and frequency of M&A transactions surpassed anything the world had ever seen. On a microeconomic level, mergers represent massive asset reallocations within and across industries, often enabling firms to double in size in a matter of months. Because mergers tend to occur in waves and cluster by industry, it is easily understood that such transactions may radically and swiftly change the competitive architecture of affected industries. It should, therefore, come as no surprise that academics have been so intrigued by the merger debate in recent years.

Examining the economic gains (value creation or destruction) of M&A is one of the most coveted research areas in financial economics. The spectacular growth of mergers has justifiably prompted many academics and practitioners to investigate whether such milestone transactions are worth undertaking. More specifically, researchers have sought to find out whether M&A create or destroy value and how the potential gains or losses are distributed among transaction participants. If synergies truly exist between bidders and their targets, M&A should have the potential of representing value-creating corporate events. This question is of utmost importance as its corresponding answer carries important policy implications for regulators and investors. Furthermore, it is vital to assess the aftermath of these colossal transactions, as lessons learned may benefit not only the corporate world, but also the society at large.

Although a plethora of research in financial economics has sought to address the issue of M&A value creation generally, the investigation of how value is created (or destroyed) and the examination of the question from a company fundamentals standpoint has largely been ignored. The bulk of the existing literature employs event study methodology as introduced and popularized by Fama et al. (1969), which examines what impact, if any, mergers and acquisitions have on stock prices. In accordance with this methodology, a merger is branded successful if the combined entity equity returns equal or exceed those predicted by some standard benchmark model. For reasons argued below, this simplistic approach too often leads to a Type II error (i.e., the null hypothesis is not rejected when in fact it is false and should be rejected) with respect to the null hypothesis that M&A are value-creating transactions. We invite readers to review the evidence and arguments presented in this article and to judge whether the event study is an appropriate tool, let alone worthy of “gold-standard” status by some financial economists, for tackling the question of whether M&A result in economic gains on an ex-post basis. We emphasize that this article does not constitute an attack on the event study in general, but rather an objection to the use of event studies as the main academic investigative tool in assessing whether M&A represent value-creating corporate events.


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