Unrelated Mergers Research Articles

Do Personal Taxes Drive Unrelated Mergers and Acquisitions?

Do Personal Taxes Drive Unrelated Mergers and Acquisitions?

Can mergers and acquisitions internalize positive externalities in funding innovation?

Fundamental innovation usually involves huge upfront costs, but the benefits are spread across various sectors of the economy. Given the large costs and limited appropriability of the benefits associated with fundamental innovations, individual firms underinvest in these innovations relative to the socially optimal level. We find that mergers and acquisitions (M&As) can internalize the positive externalities by merging firms from both the user industries and the producer industries of an innovation. Using the US patent citation dataset, we define the user and producer relationship between each pair of industries and between each pair of industry and technological class. We then show that after a merger between an innovation user and an innovation producer (related M&As), the quantity and the quality of innovation output increase, and the increase is driven by targeted technological classes. In contrast, innovation output drops after unrelated mergers. Firms' internal resource allocation and financial flexibility play an important role in determining the effect of M&As on innovation.

Long-term impact of merger synergies on performance and value

Abstract We track a sample of mergers completed between 1998 and 2007 in a five year window after the merger, to study whether and to what extent synergies affect Tobin's Q and excess value in the post-merger period. We employ a Heckman two-stage self-selection model and a two-stage non-linear-instrumental variable model to account for potential endogneities in the merger decision across related and unrelated mergers. We document that excess value is positive for related mergers while it is negative for unrelated mergers in each of the five years following the merger, while Q is significantly greater than one for both types of mergers. Q and excess value decrease in the first year following the merger, but then improve systematically each year in the four years after, but with a greater increase in unrelated compared to related mergers. Controlling for self-selection and endogeneity biases, our evidence indicates that merger synergies materialize over time, but differently in unrelated and related mergers. Annual changes in market power, economies of scale and scope, and internal capital market activity contribute to changes in Q and excess value only in unrelated mergers. We conclude that the lack of synergies from market power enhancements and capital market activity in related mergers is consistent with related mergers being motivated by a need for facilitating technology and innovation transfers rather than generating synergies.

Role of industry relatedness in performance of Indian acquirers—Long and short run effects

We explore the effect of industry relatedness on the performance of Indian acquirers using both short run and long run performance measures. We argue that mergers and acquisitions are distinct strategies, because of the unique regulatory structure and equity ownership pattern that exists in India. Their choice depends on control considerations on the one hand and regulatory imperatives on the other. Correspondingly, their sources of value creation or destruction do not always correspond to extant theories of synergy or agency. We present a modified synergy story and illustrate that, while related acquisitions create value and non-related acquisitions destroy value, both related and unrelated mergers create value.

Market Performance Of Acquiring Companies

This paper examines the market reaction to merger announcements for acquiring companies. Since the cost Accounting data contain many errors market data have been used for calculating wealth gains arising from merger activity. As the actual merger activity in India started after 1994, there is a dire need to understand its wealth impact on shareholders. With consideration of mergers taking place after 1990, the study is confined to 123 Indian acquiring companies. Total sampled cos. have been divided into four sub-samples i.e. group mergers, non-group mergers, related mergers and unrelated mergers. Daily market returns have been computed for 21 days around merger announcement. Standard event study methodology has been applied to find out market reaction. Significant negative abnormal return (ARs) of -1.24 percent are being noticed on day -1 for acquiring cos. Thus, acquiring shareholders lost at the time of merger announcement. Market response is particularly bitter for the mergers taking place between non-group companies and unrelated cos. Non-group companies experienced significant negative cumulative abnormal returns (CARs) of -11.21 percent over 21 day event window while unrelated cos. exhibited significant negative returns of -3.18 percent during the same time.

Business cycle and aggregate industry mergers

This paper tests the relationship between industry-level mergers and business cycle using panel tests that allow us to control for macro-economic and industry-level determinants of merger activity. We find robust evidence that both related and unrelated industry-level mergers are pro-cyclical. However, the evidence is asymmetric between related and unrelated mergers. We also find strong evidence in support of two major theories of merger activity that have been proposed and tested in the existing literature, namely, neoclassical theory and behavioral theory. The proxies of both neoclassical and behavioral theories explain merger activity in general; however, the pro-cyclicality of mergers is not fully captured by any of these proxies, individually or collectively.

Does corporate ownership structure affect its strategy towards diversification?

We claim that there is a link between corporate control structure and managers’ strategy towards unrelated mergers and risk diversification. Companies with greater ownership concentration are less diversified. Evidence also shows that corporate diversification generally results in value loss while focussing is value increasing. This highlights the potentially detrimental effect of agency problems on corporate strategy. Copyright © 1999 John Wiley & Sons, Ltd.

Agency problems as antecedents to unrelated mergers and diversification: Amihud and Lev reconsidered

Amihud and Lev (1981) are widely cited as providing evidence that managers, unless closely monitored by large block shareholders, will attempt to reduce their employment risk through unrelated mergers and diversification. These corporate strategies, however, may not be in shareholders' interests. Reconsidering the agency assumptions underlying Amihud and Lev's study and the methodology they used, we develop hypotheses regarding the association between ownership structure, board vigilance, corporate strategy, and corporate performance from management theory and test them using Amihud and Lev's data from the 1960s and new data from the 1980s. Neither study supports the conclusions of Amihud and Lev, nor the agency theory belief that monitoring efforts by principals affect the strategic behaviors of agents or the performance of firms that they manage. © 1998 John Wiley & Sons, Ltd.

Agency problems as antecedents to unrelated mergers and diversification: Amihud and Lev reconsidered

Agency problems as antecedents to unrelated mergers and diversification: Amihud and Lev reconsidered

Announcements of Purely Related and Purely Unrelated Mergers and Shareholder Returns: Reconciling the Relatedness Paradox

Empirical research has not generally supported the hypothesis that announcements of related mergers benefit stockholders more than announcements of unrelated mergers. This study uses a new categorization methodology to identify mergers with and without strategic fits. Purely related and purely unrelated mergers occurring between 1972 and 1990 are identified using a combination of objective and subjective categorization methods. Results support the hypothesis that purely related acquirers benefit more than purely unrelated acquirers. Acquiring firm stockholder returns were also higher if the acquisition was friendly or a tender offer. The results did not suggest that acquired firms' shareholders benefit more in purely related acquisitions than in purely unrelated acquisitions. Acquired firms’ stockholder returns were higher if the transaction was a tender offer.

Announcements of purely related and purely unrelated mergers and shareholder returns: Reconciling the relatedness paradox

Empirical research has not generally supported the hypothesis that announcements of related mergers benefit stockholders more than announcements of unrelated mergers. This study uses a new categorization methodology to identify mergers with and without strategic fits. Purely related and purely unrelated mergers occurring between 1972 and 1990 are identified using a combination of objective and subjective categorization methods. Results support the hypothesis that purely related acquirers benefit more than purely unrelated acquirers. Acquiring firm stockholder returns were also higher if the acquisition was friendly or a tender offer. The results did not suggest that acquired firms' shareholders benefit more in purely related acquisitions than in purely unrelated acquisitions. Acquired firms' stockholder returns were higher if the transaction was a tender offer.

Synergies and Post-Acquisition Performance: Differences versus Similarities in Resource Allocations

Theory suggests that synergy is an essential ingredientfor value creation to occur as a result of acquisitions. This dominant theory often argues for similarities among resources in the acquiring and targetfirms. However; it is argued here that uniquely valuable synergy might be created where differences (versus similarities) exist between resources in the acquiring and target firms. Tests of these competing hypotheses confirmed that differences contributed significantly to performance in the mergedfirm. Thisfinding may suggest that traditional distinctions between related and unrelated mergers may not be as useful as once thought. A focus on specific resources rather than strategy types in the merger and acquisition research may better explain firm performance.

Corporate mergers, stockholder diversification, and changes in systematic risk

AbstractStrategic management literature suggests a relationship between systematic risk and the relatedness of merging firms. This is tested for a sample of 120 large mergers by controlling for the systematic risk of the target firm, correcting for possible problems of heteroskedasticity, and estimating shifts in risk over daily as well as monthly time horizons. Finally, the influence of leverage is considered. The findings highlight a performance distinction between corporate diversification and stockholder diversification in instances of related and unrelated mergers.

Value-Creating Mergers: Fact or Folklore?

Since 1983, over 12,000 companies and corporate divisions worth about one-fifth of the market value of all traded stocks have changed hands. Investment bankers and corporate lawyers have prospered, and words such as raiders, greenmail, white knights, and golden parachutes have been added to our vocabulary. This enrichment aside, however, are mergers good for much else? consensus of the popular business press, which continues to focus on mergers that backfire, seems to be ''no. Almost every month a major article appears with a title such as The Decade's Worst Mergers, and Have Mergers Gone Too Far? These articles love to recount the details surrounding problem-plagued mergers such as Exxon's $1.2 million blunder with Reliance Electric, Kennecott's mismanagement of Carborundum, or Coca-Cola's surprising setback with Taylor Wines.' position of more than two dozen bills recently introduced in Washington to restrict merger activity is also no. Proponents of these bills assert that the U.S. economy has suffered because mergers squander resources in the pursuit of illusory efficiency gains. Among the backers of these bills is Andrew C. Sigler, who is president of the Business Roundtable, an organization made up of the 200 largest corporations. Sigler charges that mergers are nothing but a grubby asset play that is damaging the capability of the economic system to perform.2 Financial economists such as Professor Michael Jensen of Harvard and Richard Ruback of MIT represent a more tempered opinion. They maintain that selling firms' shareholders do benefit, but that the buying firms' shareholders do not. At best, they say, the bidding-firm shareholders do not lose. In addition, they find mergers to be ineffective in reducing shareholder and business risks.3 These observations present a sobering picture of corporate decision makers. If on average mergers do not create value for the acquiring firms, why do managers continue to initiate them? Are managers oblivious to the legacy of those who have failed before them? Or are managers acting in their own interests because their rewards are more closely tied to corporate growth than to corporate value? purpose of this article is to suggest a different view, one that comes from a growing body of literature that considers the strategy underlying mergers. This literature recently has produced three dissertations that earned national awards for excellence from the Academy of Management as well as a growing number of published articles on mergers.4 It presents findings that challenge the widely held beliefs concerning the value of mergers. We begin with a review of the theory of corporate diversification as it pertains to mergers. potential benefits and practical impediments of related and unrelated mergers are discussed as background to this basic question: Can a firm create value for its shareholders through merger? We investigated the questions from the perspective of two conditions that are valuable to shareholders. One is when stock returns (appreciation plus dividend) increase as a result of merging, and the increase is in excess of the merging firm's cost of equity and general stock market movements; that is, when a merger causes abnormal returns. Evidence is presented from the strategic management literature that examines abnormal stock returns from the perspectives of selling and buying firms' shareholders. second condition is when shareholder risk (cost of equity) declines as a result of a merger to a degree greater than that which could be realized through a securities manager's investment in both businesses. Shareholder risk is basically the variability in a firm's stock returns that is caused by the variability in the market's returns. Another name for shareholder risk, therefore, is systematic risk. We consider evidence on mergers and shareholder risk, and mergers and the full variability in a firm's stock returns that is, total risk. Finally, we offer practical suggestions for improving the effectiveness of mergers. suggestions are particularly timely in light of the increased attention currently focused on shareholder value and the fact that many executives are unsure of exactly how their firm's actions affect stock price. For example, a Louis Harris and Associates, Inc. poll found that 60% of executives surveyed do not agree with the market's valuation of their company.5

The Intraorganizational Power Struggle: Rise of Finance Personnel to Top Leadership in Large Corporations, 1919-1979

Choosing a president in an organization is an important political decision that reflects who controls the organization and the bases for that control. In this paper, a model of power based on resources in the organization and the environment is specified in order to understand how power shifted between intraorganizational units in the 100 largest U.S. firms between 1919 and 1979. Early in the century, large firms were controlled by entrepreneurs or personnel who came up through manufacturing. In the middle decades, sales and marketing personnel controlled large firms. In the past 25 years, finance personnel have become increasingly dominant. These shifts resulted from changes in the strategy and structure of the organizations, changes in antitrust laws that promoted an increase in product-related and unrelated mergers in the postwar era, and the mimicking of firms in similar environments.