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Wealth creation of mergers in downturn markets

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Abstract

We examine the short- and long-term effects of market phases on the wealth creation potential of mergers and acquisitions. We argue that transactions in weak market environments create more long-term value for shareholders than transaction in booming markets. The analysis focuses in particular on transaction in depressed markets to identify drivers of outperformance. The results show that more selective, smaller and cash financed acquisitions significantly increase shareholder wealth in weak market environments. However, acquisitions of distressed firms are highly value decreasing.

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Notes

  1. Based on European M&A data from Thomson Reuters’ SDC Platinum Database.

  2. The results remain robust when applying the 100, 150, 220 largest companies per industry.

  3. The ICB is published and maintained by Dow Jones und Financial Times Stock Exchange (FTSE). It classifies companies based on their main sources of revenue in 10 industries with 114 sub-sectors. The considered industries are (i) oil and gas (0001), (ii) basic materials (1000), (iii) industrials (2000), (iv) consumer goods (3000), (v) health care (4000), (vi) consumer services (5000), (vii) telecommunication (6000), (viii) utilities (7000), and (ix) technology (9000). Financial Institutions (8000) incl. real estate and private equity companies are not considered due to often unclear differentiation between strategic acquisitions and trade sales as well as for the special properties of the applied financial rations (see Martynova et al. 2006).

  4. Bouwman et al. (2009) discuss and contrast in depth different methodologies of classifying market valuation levels. Besides P/E ratios they examine market-to-book (M/B) and overall index levels of the S&P 500. They also test the robustness of their approach to changes in de-trended period and changes in the classification window from month to quarters.

  5. Mitchell and Stafford (2000) discuss and contrast the BHAR and FF3F approach for different applications in event studies. Their results favor FF3F. Other studies, however, argue in favor of BHAR finding that FF3F has less power to identify abnormal returns.

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Authors and Affiliations

  1. Department of Business, Economics and Law, Technische Universität Darmstadt, Hochschulstraße 1, 64289, Darmstadt, Germany

    Ulrich Erxleben & Dirk Schiereck

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  1. Ulrich Erxleben
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  2. Dirk Schiereck
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Correspondence to Dirk Schiereck.

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Erxleben, U., Schiereck, D. Wealth creation of mergers in downturn markets. J Manag Control 26, 317–345 (2015). https://doi.org/10.1007/s00187-015-0217-y

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