Abstract
PurposeThe purpose of this paper is to examine the effects of the post-merger integration duration on acquiring firms’ leverage behavior before and after a merger, using a dynamic model in which full merger benefits cannot be consumed at the instant of a merger, but rather after a pre-specified post-merger integration period.Design/methodology/approachThis paper presents a dynamic model and empirical tests that describe the impact of the post-merger integration period on the capital structure dynamics of the acquiring and target firms prior to a merger and during the post-merger integration period. By incorporating costs associated with the post-merger integration period, the model can provide new implications for the leverage behavior around the merger.FindingsEmpirical tests support the model implications by showing that the longer the expected post-merger integration process, the less likely the acquirer will structure the financing of the combined firm in a manner that increases firm leverage. Since integration takes time to complete, an acquirer tends to retain financial flexibility during the integration process by assuming lower levels of debt when determining the capital structure of the merged entity.Originality/valueThe model generates new implications related to acquiring firms’ leverage dynamics along with the method of payment choice. The analysis of the duration of the post-merger integration period extends both the theoretical and empirical literature that tacitly assumes that the merger-related synergy is realized immediately at the merger date. This is the first model in the literature that assumes that both the acquiring and the target firms can change their capital structure overtime, which allows us to analyze both the financing structure and the merger timing. Previous empirical studies also ignore the integration period in the analysis of the method of payment choice and leverage behavior around mergers. The model in this paper can be extended along a number of dimensions.
Highlights
1.1 Research objectives The integration of two merging firms takes time to complete. We refer to this time lag between the initiation of the merger and its completion as the “post-merger integration duration” (PMID)
1.2 Content This paper examines the effects of the Post-merger integration duration (PMID) on acquiring firms’ leverage behavior before and after a merger, using a dynamic model in which full merger benefits cannot be consumed at the instant of a merger, but rather after a pre-specified post-merger integration period
As soon as the acquirer, which currently sells its product at price p1, merges with the target firm, which sells its product at p2, the merged firm begins selling both products of two firms and generate earnings of p1+p2
Summary
We refer to this time lag between the initiation of the merger and its completion as the “post-merger integration duration” (PMID) This means that the synergy gains from the merger cannot be captured instantly at the merger date but rather only after the firms go through an integration/ transition period. There have been numerous reports of culture clashes, confusion and internal disruptions leading to declines in employee and customer satisfaction and loss of profitability For these reasons, companies that expect a longer post-merger integration period may face temporarily higher expenses spread over a longer period coupled with higher operating risk. Starting with the universe of mergers that took place between 1999 and 2017, we select mergers in which we can gather data on the expected time for merger-related gains to materialize Using this method, we come up with a sample of 3,120 mergers in which we can create the variable for the expected integration duration. Because the model endogenizes both the capital structure decisions and the merger timing, it can offer a rationale for several time-series observations around mergers
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
