Post-merger Performance Research Articles

Abnormal Accruals and Managerial Intent: Evidence from the Timing of Merger Announcements and Completions

We examine the extent to which managers report opportunistically prior to corporate events by analyzing the association between the timing of stock swap announcements and completions and acquirers’ reporting behaviors. Using the timing of merger announcements and completions to infer managerial intent, we show that stock-for-stock acquirers’ reporting behaviors are opportunistic. More specifically, we show that stock-for-stock acquirers that inflate earnings the most tend to announce mergers on Fridays, while distancing some of their earnings management activities from the merger announcement date. The negative association between the post-merger announcement market performance and pre-merger announcement abnormal accruals is more pronounced for Friday announcers than for non-Friday announcers. Furthermore, the differential pre-merger abnormal accruals across Friday and non-Friday announcers are observed mainly when the announcement date is relatively close to the completion date. Overall, the evidence supports the notion that pre-acquisition abnormal accruals are related to deliberate opportunistic managerial decisions.

Post-merger changes in bank credit risk: 1991-2006

Purpose – This paper aims to examine the post-merger changes in the credit risk profile of merging bank holding companies and tests whether there is an increase in credit risk after a merger due to changes in the mix of loans in the portfolio. Design/methodology/approach – The authors use the expected variability of the credit risk of a loan portfolio based on the mix of loan types in the portfolio and the variability of the industry credit losses of each type following the standard Markowitz procedure for finding the standard deviation of an investment portfolio. The authors then test to see whether there has been a significant change in the expected variability (the credit risk profile) after a merger. Findings – The authors find that there are significant differences in both the level and variability of loan charge-offs and non-performing loans (NPL) among the various loan categories. The authors also find significant changes in the mix of loan categories in the loan portfolio after a merger. In addition, the authors find that the expected variability in both the charge-off rate and the NPL rate rises significantly after a merger. Research limitations/implications – This is the first of two papers looking at post-merger changes in credit risk based simply on the changes in the mix of loan types; it does not consider the actual post-merger credit performance of the specific mergers. That will be addressed in a subsequent paper. Practical implications – Financial analysts evaluating banking merger announcements may wish to include the impact of the likely shifts in loan mix and credit risk shown in this paper as they project the likely impact of the merger. Originality/value – This paper addresses an aspect of bank mergers that has not been addressed in the literature, the impact of mergers on credit risk. The results are likely to be useful to investors, financial analysts and regulators.

Successful merger decisions in Greece: Facts or delusions?

This study examines the success of merger decision in Greece during the last years through an extensive accounting study. The events of mergers and acquisitions (M&As) that have been performed from all merger-involved firms listed on the Athens Stock Exchange in the period from 2005 to 2007 are evaluated using accounting data (financial ratios), and from them the final sample of the study that is finally investigated consists from thirty five Greek firms, which executed one merger or acquisition in the period from 2005 to 2007 as acquirers and have not performed any other important acquiring decision in a three-year-period before or after the examined M&As transactions. For the purpose of the study, a set of sixteen ratios is employed, in order to measure firms’ post-merger performance and to compare pre- and post-merger performance for three years (or two years or one year) before and after the M&As announcements (with data analysis from 2002 to 2010). Furthermore the impact of the means of payment, of international or domestic M&As and of conglomerate or non-conglomerate mergers are evaluated. The results revealed that mergers have not any impact on the post-merger performance of the acquiring firms. Thus, the final conclusion that conducted is that the M&As activities of the Greek listed firms of this research have not lead them to enhanced post-merger accounting performance. Last, from the research results, it is clear that there is no difference from the mean of payment (cash or stock exchange) on the post-merger performance at the acquiring firms, and there is a better performance for international and conglomerate M&As.

Relevance of Goodwill Reporting to Post-merger Performance: Case Studies of Technology-driven Multinationals

This study examines issues about reporting of goodwill as an intangible asset with relevance to post-merger performance. It suggests a framework to articulate the financial reporting of goodwill in terms of its usefulness in reflecting post-merger performance under the emerging international standards. A multiple-case study approach is adopted to look into three multinationals with continuing dependency on technological innovation. Their disclosures on goodwill and compliance with their respectively adopted international financial reporting standards during post-merger operations are analysed. The authors argue that regulations on international financial reporting need to be designed and implemented consistently across borders in order to enhance relevance of goodwill reporting to post-merger performance.

Examining bank mergers and acquisitions in Greece before the outbreak of the sovereign debt crisis

In this study Mergers and Acquisitions (M&As) and business performance of banks in Greece are examined through an accounting approach. Using accounting data (financial ratios), the post-merger performance of a sample of Greek banks, listed on the Athens Stock Exchange that executed at least one merger or acquisition in the four-year-period from 2004 to 2007, is investigated. For the purpose of the study, a set of nineteen ratios is employed, in order to measure banks’ operating performance and to compare pre- and post-merger performance for three, two and one year before and after the M&A. The results revealed that M&As had a positive impact on the post-merger performance of merger-involved firms, except of dividend policy, which had to be moderate and conservative, because of the global financial crisis. The results showed that the effect of M&As on sample’s business performance, is not direct, but it becomes obvious during the next two years. Last, the number of ratios, which are statistically and significantly changed, is bigger as the control interval widens and the common ratios have an identical variation.

The Long-Run Performance of Asian Commercial Bank Mergers and Acquisition

In this paper, we investigate the long-run post-merger performance of Asian acquiring bank by using 293 deals in the 1997-2007 periods. We find the Asian acquiring banks experience negative long-term abnormal returns and are not efficiency improving, followed by mergers and acquisition. However, DeYoung, Evanoff and Molyneux [1] find European bank mergers appear to have resulted in both efficiency gains and stockholder value enhancement and North American bank mergers are efficiency improving, although the event-study literature presents a mixed picture regarding stockholder wealth creation. Therefore, our empirical results show that the long-run stock returns and operating performance of Asian commercial bank mergers are different from those of the US and EU markets. In general, the long-run stock performance and operating performance of Asian commercial bank merger and Acquisition are negative and Asian commercial bank merger and Acquisition cannot create synergy in the long run.

The Impact Of Adjustment In Capital Structure In Mergers & Acquisitions On Us Acquirers Business Performance

This paper examines the impact of adjustment in capital structure on 850 US acquirers business performance, within five years after mergers. We consider both leverage changes and adjustment in leverage deficit as our independent variables, and use Return On Equity (ROE) and Return On Assets (ROA) to measure post-merger performance. We find that leverage changes have a negative impact on performance, in both the short and long run after Mergers & Acquisitions (M&A), indicating that financial flexibility contributes to acquirers post-merger performance. The results also show that acquirers with movement toward target leverage ratio enjoy better performance after M&A, but the correlation is not significant in the long run. Therefore, high financial flexibility created by low leverage is more essential to acquirers facing costly and sophisticated post-merger integration, than target leverage ratio that minimizes financing cost immediately.

Impact of Bank Mergers on the Efficiency of Banks: A study of merger of Bharat Overseas Bank with Indian Overseas Bank

After the implementation of reform measures, there has been large changes in the philosophy, perceptions, and functioning of commercial banks and banks are expected to manage the large inflows and outflows of financial resources. Therefore a strong banking system through consolidation is required. Under such situations, it is necessary to study the impact of consolidation on different profitability and efficiency parameters of the banks. In the paper the attempt is made to compare the pre-merger and post-merger performance of Bharat Overseas Bank and Indian Overseas Bank by comparing different efficiency parameters like Profit Per employee, Business Per Employee, Investment and Advances, Interest Income, Return on Assets, NPAs etc. The study concluded that after merger there is improvement in all the parameters of the banks. Since 1992, the Indian Banking system has undergone several changes in terms of organisation, functions, resource mobilisation, socio-economic role, problems and solutions. The Indian Banking system has travelled a long way from a highly regulated environment in relation to different parameters such as branch, location, interest rate on deposits and advances, priority sector lending etc. to a highly competitive environment by implementation of reform measures since 1992. In the pre-reform period, profitability was not considered as an important yardstick to evaluate the performance of the banks, particularly the public sector banks. But after the implementation of reform measures, there have been sea changes in the philosophy, perceptions and functioning of commercial banks. In order to understand the changing role of commercial banks and the problems and challenges that they have been facing presently it would be appropriate to study the major developments in the banking sector during the post reform period. One such development that has significantly affected the banking structure is the process of consolidation through Merger & Acquisition. In practice M& A provide an opportunity to banks to share their resources, reduce intermediate costs & expand delivery platforms & to improve chances for economies of scale in their operations. These developments are expected to have important implications for operating performance and profitability in the banking system. Therefore from the view point of both managerial and policy interests, it is extremely important to know how the banking industry has been reacting to the

Importance of Due-Diligence in Cross Border Mergers & Acquisitions - A Case Study of High-Tech Industry

The Due-Diligence is a critical evaluation process to be executed prior to taking decision of merger of two companies. This process plays a very significant role in cross border mergers of high-tech companies where technical, cultural, financial, legal and business parameters govern the success of the merger. This paper studies the merger of two high-tech companies located in different countries. The source company was interested to buy the target company to leverage the technological integration of both companies thus enabling development of a new cost optimized product. The focus of this paper is to examine various aspects of business such as finance & human factors influencing the post-merger performance, then reviewing challenges faced. Suggestions have been provided for careful considerations of some of important factors during the Due-Diligence process prior to the merger in similar integration scenarios. This study is mainly focused on high-tech industry though learning from the analysis can be applied to other industries as well.

Financial consequences of mutual fund mergers

This study examines the impact of mutual fund mergers on performance and investment flows of target and acquiring funds. Results indicate some improvements in the post-merger performance for target funds shareholders. Results also confirm prior evidence of negative net asset flows in target funds in the pre-merger period as well as negative, but not significant, net asset flows in the years following the merger. However, a more detailed analysis allows us to observe that this lack of significance in the negative reaction of investors to mutual fund mergers is explained by the compensation of abnormally high inflows and outflows in the resultant funds. These substantial flows are significantly above the average in their market segment, especially regarding money flows. This finding provides evidence that investors pay attention to mutual fund mergers, especially institutional investors who are concentrated on the market possibilities resulting from these organizational processes.

Walking the Talk: A Multistakeholder Exploration of Organizational Authenticity, Employee Productivity, and Post-Merger Performance

Does consistency between how a firm treats employees (what it does) and its espoused employee-oriented values (what it says) affect employee productivity? Furthermore, given that the stakeholder theory perspective holds that what happens to one stakeholder influences other stakeholders, does this sort of consistency vis-à-vis a firm's customers also influence employee productivity? We empirically investigate the influence of organizational authenticity—defined as consistency between a firm's espoused values and realized practices—in the context of a merger, and specifically during post-merger integration. Our findings show that a lack of organizational authenticity in terms of both under-promising and over-promising to both employees and customers is associated with lower productivity, which in turn is related to long-term merger performance, thus affecting outcomes for shareholders. These findings support the importance of authenticity and should therefore be of interest to executives responsible for ensuring the consistency between what a firm says and what it does, as well as those who participate in and study the merger integration process. In particular, we propose stakeholder theory as a helpful lens for examining the merger integration process as well as other joint actions such as strategic alliances.

Do acquiring firms knowingly pay too much for target firms? Evidence from earnings management in member-firm mergers in Korean business groups

In a typical stock-for-stock merger between the firms belonging to the same business group (member-firm mergers), the controlling shareholder’s holdings in the target firm are more than twice those in the acquiring firm. This difference in the controlling owner’s holdings in the acquiring firm and the target firm creates a strong incentive for the controlling owner to knowingly pay more for the target firm than the target firm is actually worth. We find that acquiring firms deflate earnings in order to increase the numbers of shares to be issued to the target firm’s shareholders. Furthermore, the level of earnings deflation is systematically related with the controlling owner’s expected benefits measured in several different ways. We also find that the stock price reaction to member-firm merger announcements is negatively correlated with the pre-issue-period earnings deflation. In addition, the results show that post-merger performance in member-firm mergers is lower than that in independent firm mergers.

Institutions and the performance of politically connected M&As

We investigate the association between a firm’s political connections and its merger and acquisition (M&A) performance. Using a sample of M&A deals made by politically connected acquirers and their matched non-connected peers across 22 countries, we find that political connections play an economically significant role in post-merger performance. The nature of this effect depends on the institutional setting. In countries with strong legal systems or low levels of corruption, politically connected bidders underperform unconnected bidders by roughly 15% in terms of abnormal stock returns over a 3-year period. In contrast, politically connected bidders outperform unconnected bidders by more than 20% in countries with weak legal systems or high levels of corruption. We find more evidence of differential post-merger performance for domestic mergers than for cross-border mergers. Overall, our findings show that political connectedness has a significant influence on M&A activities, and the nature of this influence depends crucially on the institutional environment.

Mutual fund skill and the performance of corporate acquirers

We show that the commonly observed correlation between institutional investor ownership and the success of mergers is partly driven by active stock picking. Several mutual fund stock selection skill measures strongly predict the post-merger performance of corporate acquirers even after controlling for possible shareholder monitoring. These findings are stronger for funds with characteristics more indicative of active stock picking. Moreover, firms held by funds with higher stock selection skills are more likely to subsequently become acquirers, suggesting that the mutual fund skill set includes the ability to identify acquirers with value-enhancing acquisition opportunities.

A Study of Profitability Impact of Post-merger Performance with Reference to HDFC Bank - Centurion Bank of Punjab

This paper examines profitability of the acquiring company in the pre-merger and post-merger period. The selected company is HDFC Bank which took over Centurion Bank of Punjab in July, 2008. Various tools like ratio analysis, trend analysis and statistical t-test are used for evaluating the profitability of HDFC Bank. The results reveal that profitability has increased in the post-merger period. However, the increase is not significant except in case of ratio “Return on Equity” (ROE). Mergeris neither healthy nor loss incurring to the profitability of the bank.

The Role of Cross-Border Mergers and Acquisitions in Energy Security

In recent years, national and global energy security has become a key political and economic issue, and the players in this global energy game are also diversified. Corresponding to the diversified sectors and multiple components, energy security can be studied from a number of perspectives. We will focus on the behavior of energy companies in this study. Specifically, we are to examine the role the cross-border mergers and acquisitions (M&As) of oil & gas companies can play in energy security. The upcoming analysis comprisesof four parts. The Background section reviews the global energy security from the angle of national consumption and production, followed by a brief analysis of global oil and gas industry and market. The status quo of major oil and gas companies will be reviewed and global M&As’ landscape is illustrated in the section as well. The second part is our primary focus, exploring the cross-border M&As in energy industry, in particular, oil and gas companies. This literature review will examine how those energy transactions can influence the competition, economy and national welfare, and other related aspects. Then we concentrate on the features and drives of energy M&As based on transaction records available, and attention is paid to the valuation of post-merger performance of acquirers. The third section aims at providing practical knowledge for energy M&As by integrating some legal and financial knowledge in the business world.

The Post-Merger Performance: Evidence From Italy

The Post-Merger Performance: Evidence From Italy

Performance and Survival of Mutual Fund Mergers: Evidence from Frequent and Infrequent Acquirers

In this paper, we study the determinants of mutual fund mergers, and the performance and survival outcomes of the acquirers involved in these mergers. Across all estimations, we distinguish between frequent and infrequent acquirer categories. We first find that the fund’s performance, size, fees, flows and age guide the merger decision. Distinguishing between frequent and infrequent acquirers, we also show that, after the acquisition, the latter exhibit a larger decline in performance than frequent acquirer’s. From deal to deal, frequent acquirers do not seem to target higher performing funds, and suffer from a worsening and persistent poor post-merger performance. We also find that the merger probability of the acquirer is negatively related to within-family acquisitions, mergers involving an infrequent acquirer, fund size and performance of both the target and the acquirer. The target fund’s size and performance have a more important impact on the survival of infrequent (as opposed to frequent) acquirers rather than frequent acquirer funds.

A model of China's export strengthening outward FDI

Recent surges of China's outward FDI feature four stylized facts: China's OFDI is predominately conducted by state owned or state controlled enterprises (SOEs); a large proportion of such OFDI takes the form of cross-border M&A; most of the target firms are failing firms, which lead to poor post-merger performance; despite the poor performance, they often receive political resistance from the destination developed countries. In this paper, China's OFDI is characterized in a North–South two-country oligopoly FDI model with a public firm in the South aiming to maximize social welfare instead of only its own profit. It is shown that compared to the fully privatized industry, the public firm is more inclined to conduct cross-border M&A but less efficiency oriented, and such M&A is more harmful to the destination country as a whole. We also show that the public firm is socially desirable for the source country when there is foreign competition. The intuition is that the public firm, although less efficient, minimizes the horizontal externalities and acts as a proxy of the regulator and protects home private firms from foreign competition in the export market. Therefore, such OFDI strengthens private firms' exports to the destination country.

Do Acquirer CEO Incentives Impact Mergers?

This paper examines the mechanisms by which acquirer CEOs are incentivized and their impact on merger decisions. We argue that the pre-merger structure of CEO wealth impacts a CEO’s risk tolerance and ultimately her willingness to undertake a merger as well as the framework of the deal. As the riskiness of CEO wealth increases (as measured by excess vega or cumulative option-based wealth), firms are more likely to become an acquirer, pay higher premiums, and experience lower post-merger performance. These results hold controlling for CEO overconfidence and cannot be attributed to firms altering incentives to induce CEOs to partake in mergers. Post financial crisis, we find both a shift in the composition of CEO pay and its relation to mergers. Overall, these results have important policy implications in the debate over optimal CEO pay as the structure by which CEOs are compensated appears to impact firm choices.