The Impact of Merger and Acquisition Activities on Corporate Performance Measured on an Accounting and Market Base

Table of contents

List of abbreviations

List of symbols

List of illustrations

List of appendices

1 Introduction
1.1 Problem and research question
1.2 Research design
1.3 Structure of the paper

2 Literature review
2.1 Market-based studies
2.2 Accounting-based studies

3 Transactions
3.1 Fundamentals of transactions
3.1.1 The M&A term and basic forms of transactions
3.1.2 The M&A process
3.1.3 Motives for M&A activities
3.2 Key drivers of M&A
3.2.1 Determinants by Datta, Pinches and Narayanan (1992)
3.2.2 Determinants by Hitt et al. (2012)
3.2.3 Further relevant drivers of M&A
3.2.4 The underlying determinants for the empirical study
3.3 Development of transaction markets
3.3.1 Reasons for M&A waves
3.3.2 Development of the global market of corporate control
3.3.3 The German transaction market

4 Methodologies
4.1 Market-based measurement
4.2 Accounting-based measurement
4.3 Strengths and weaknesses

5 Empirical investigation
5.1 Data sample and screening procedure
5.2 Hypotheses

6 Statistical analyses and results
6.1 Market-based approach: Short-term shareholder’s return
6.1.1 Robustness
6.1.2 Bidding versus target companies
6.1.3 Univariate regression analysis
6.1.4 Multivariate regression analysis
6.2 Accounting-based approach: Long-term operating performance
6.2.1 Robustness
6.2.2 Bidding versus target companies
6.2.3 Univariate regression analysis
6.2.4 Multivariate regression analysis
6.3 Overall statement

7 Limitations and future outlook

8 Summary and conclusion

Appendix

References

List of abbreviations

illustration not visible in this excerpt

List of symbols

illustration not visible in this excerpt

List of illustrations

Illustration 1: Clustered literature overview

Illustration 2: Empirical studies investigating the short-term return of M&A activities

Illustration 3: Empirical studies investigating the long-term performance of M&A activities

Illustration 4: Categorisation of key determinants affecting the M&A success

Illustration 5: German market of corporate control from 1988 to 2012

Illustration 6: Hypotheses for the statistical analysis

Illustration 7: Average abnormal returns for bidding firms

Illustration 8: Average abnormal returns for target firms

Illustration 9: Findings from short-term and long-term analysis

List of appendices

Appendix 1: Event study benchmark indices

Appendix 2: Overview of the primary data sample

Appendix 3: Overview of samples

Appendix 4: Variable definition for the regression model

Appendix 5: Short-term study: Average abnormal returns of acquiring and target firms

Appendix 6: Short-term study: Descriptive statistics

Appendix 7: Short-term study: Cross-correlation matrices

Appendix 8: Short-term study: Cumulative average abnormal returns for acquiring companies

Appendix 9: Short-term study: Cumulative average abnormal returns for target companies

Appendix 10: Short-term study: Cumulative average abnormal returns for target and acquiring firms

Appendix 11: Short-term study: Univariate regression models for bidding firms

Appendix 12: Short-term study: Univariate regression models for target firms

Appendix 13: Short-term study: Sample description by industry

Appendix 14: Short-term study: Cumulative average abnormal returns by industry for acquiring firms

Appendix 15: Short-term study: Cumulative average abnormal returns by industry for target firms

Appendix 16: Short-term study: Multivariate regression models for bidding firms

Appendix 17: Short-term study: Multivariate regression models for target firms

Appendix 18: Long-term study: Descriptive statistics for bidding companies

Appendix 19: Long-term study: Descriptive statistics for target companies

Appendix 20: Long-term study: Cross-correlation matrices for acquiring companies

Appendix 21: Long-term study: Cross-correlation matrices for target companies

Appendix 22: Long-term study: Pre- and post-deal operating performance for acquiring companies

Appendix 23: Long-term study: Pre- and post-deal operating performance for target companies

Appendix 24: Long-term study: Sample description by industry

Appendix 25: Long-term study: Operating performance across several years

Appendix 26: Long-term study: Univariate regression models for bidding firms

Appendix 27: Long-term study: Univariate regression models for target firms

Appendix 28: Long-term study: Multivariate regression models for bidding firms

Appendix 29: Long-term study: Multivariate regression models for target firms

1 Introduction

“Warren Buffett swallows Heinz: Sauce for the sage” – a typical takeover announcement was published lately on 14th February 2013.^[1] Warren Buffett, a well known investor, acquired along with the financial investor 3G Capital the H. J. Heinz Company for $ 28 billion. This is likely to become the largest transaction in the food industry. The company's stock price rose more than 20.0 percent after the publication which is a very characteristic reaction to deal announcements. Hence, the important question is, if transactions, such as the takeover of the H. J. Heinz Company, affect the corporate performance consistently.

In general, the core idea about mergers and acquisitions (M&A) is to generate additional future growth if for example organic growth is limited.^[2] If two companies merge or a target is bought by another company (the acquirer), shareholders believe in synergy effects. These are revenue enhancements, cost reductions, tax gains and reduced capital requirements leading to business growth and thus to a higher value of the new company.^[3] However, it is questionable if this theory can also be experienced in the real world.

Ever since the effects of M&A have been analysed, the market of the United States (US) was used as data source. This is plausible due to the fact that the very first information was well recorded for US companies.^[4] It is remarkable that literature contributes very little research on Europe, although the number of announced European transactions is comparable to those of the US.^[5] For example, in 2007 the European deals volume overtook the one from the United States of America (USA) for the first time.^[6] Moreover, research on single European countries almost never exists or only rarely.^[7] One exception is the United Kingdom (UK) with an early takeover history beginning in the 1960s.^[8] However, European countries should be analysed separately because of its high diversity regarding the accounting framework, the corporate governance or the legal and regulation structure. For instance, Germany is characterised by conservative accounting principles and a high regulation by the banking sector.^[9] These issues may also influence the M&A decision making process.

1.1 Problem and research question

According to recent investigations many factors were identified influencing the success of transactions.^[10] Examples are the payment method, book to market ratio, type of transaction, takeover strategy, bid attitude and macroeconomic conditions.

In previous studies the impact of M&A on company’s wealth was measured by various methods. For example, those can either be based on short-term market indicators mostly derived from stock price information or on accounting indicators such as profitability or sales ratios representing the long-term firm’s performance.^[11]

The underlying theory of synergy effects resulting from M&A leads to the assumption that transactions will create a significant positive wealth gain for the acquiring and target company. This value is measured first by short-term abnormal returns for shareholders and second by the long-term firm’s profitability. Moreover, the success is triggered by various key factors.

In comparison, previous investigations on short-run event studies mostly conclude that acquisitions have a negative or zero return to acquiring firms.^[12] On the other hand, findings from Canadian transaction market show positive abnormal returns to acquirers.^[13] Thus, it is interesting to examine the isolated effect on German M&A activities. Furthermore, recent accounting-based measurement studies contribute controversial results as well. While Ravenscraft and Scherer (1989) reported a negative impact on operating return on assets (ROA), Guest, Bild and Runsten (2010) reported a positive abnormal return on equity (ROE) in the long-run and Gugler et al. (2003) reported a significant positive effect on acquiring firm’s profitability.^[14] At this point, it should be mentioned that results from accounting-based investigations cannot be easily compared due to different accounting methodologies.^[15]

Hence, this master thesis tries to shed light on the success of German transactions by studying key determinants influencing the corporate performance through an empirical study.

1.2 Research design

The data for German transactions is collected from Bloomberg database which goes back to 1988 and the mergermarket database goes back to 1998.^[16] Considering the data accessibility of both databases the observation period for this empirical study is defined from 1st January 1998 to 31st December 2012. Among other things, information is recorded regarding the deal type, announcement date, deal status, target company’s name, the acquirer’s name and announced value (in Euro). Further information, such as the payment type (cash or non-cash), status of the bid (hostile or friendly) and various financial ratios, is also frequently reported. Based on this information, Thomson Reuters Datastream and Worldscope databases are used to obtain the corresponding stock prices as well as different accounting information of the companies involved in the transaction process.

As stated, the takeover performance can be measured either by market indicators or accounting ratios. The advantage of market performance measurements is the better comparability instead of accounting measurements which can be influenced by accounting policies and earnings management.^[17] However, various researchers prefer accounting-based methodologies because they represent the long-run performance of a business and if takeovers are successful, this should be recognised in accounting items as well as in short-term stock price reactions.

In the market-based approach cumulative average abnormal returns (CAARs) are calculated from the stock prices to examine the short-term performance. A regression analysis follows which includes the CAARs as the dependent variable and a variety of explanatory variables.

These variables can be divided into two groups. The first contains deal specific characteristics in a M&A process and the second includes other factors that might affect the takeover performance. Regarding the first group of variables, one research question might be if the corporate performance differs while taking for instance the type and the payment of the transaction into account. Examples for the second group are dummy variables for different industry sectors, which can be integrated to control for industry-specific impacts. It is to expect that certain industry groups realise higher gains from deals compared to others. The observation window of 15 years enables to analyse corporate performance in time of economical ups and downs. Macroeconomic influences, such as the financial crises during 2007 and 2010, can be reflected by a proxy for the economical situation as the worldwide gross domestic product (GDP). In addition, a proxy for the firm size can be generated to explain whether larger companies benefit more from takeovers than smaller ones or vice versa.

In the accounting-based approach corporate performance is measured by the ROE and two cash flow based ratios. Both are calculated from financial information obtained by Datastream and Worldscope. The first regression analysis studying the short-term effect is followed by a second regression analysis concentrating on the long term operating performance including the same types of independent variables.

1.3 Structure of the paper

The study starts with a brief introduction. The second chapter focuses on previous studies that contributed important results to literature in regard of market-based and accounting-based measurements. The next chapter is divided into three paragraphs. The first introduces the theoretical background of transactions. The second explains key drivers of M&A and defines the final determinants which are used in the empirical part of this paper. The last paragraph describes reasons for M&A waves, and gives an overview of the development of the global and German market of corporate control. The fourth chapter describes the methodologies – market-based measurements and accounting-based measurements – theoretically and shows how the underlying data is applied. Based on this, the data and hypotheses for both approaches are explained. The sixth chapter presents the statistical and economical results. Thereafter the underlying limitations of the study and possible future research questions are described. The study ends with a concluding chapter.

2 Literature review

This chapter gives an overview of existing literature that examines the effect of M&A activities for acquiring and target firms and the corresponding results from the most important surveys.

The number of investigations regarding takeover performance increased tremendously during the last four to five decades.^[18] Thus, some publications only focused on giving a comprehensive overview of this development. Important reviews that were published are clustered and demonstrated in illustration 1.

Illustration 1: Clustered literature overview^[19]

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At first glance, it should be noted that previous reviews focused on studies assessing stockholder’s return because only those existed. Since 2000 both market-based measurements and accounting-based measurements were reviewed. This development represents the shifting methods to determine the wealth of M&A.

Jensen and Ruback (1983) as well as Agrawal and Jaffe (2000) are one of the key ordinary reviews for market-based measurement studies. Bruner (2002) was one of the first papers which combine both measurement methods. Tuch and O'Sullivan (2007) as well as Martynova and Renneboog (2008) indicated the difference between long-run and short-run returns. Ismail, Abdou and Annis (2011) added to its review mix-based and qualitative measurements.^[20]

Apart from ordinary reviews which summarise the most important research papers and present their results in spreadsheets, meta-analyses are available. The first meta-analysis was published by Datta, Pinches and Narayanan (1992)^[21] who used the evidence on M&A performance from multiple external studies and combined these for an own regression analysis.^[22] King et al. (2004) extended the meta-analysis by incorporating studies that measure the transaction success on an accounting base.^[23]

From the geographical point of view, it is to mention that former research papers analysed US companies because information was available just for those.^[24] Over time academics also focused on the UK. And recently European and Asian firms were used as data sample for empirical investigations. For this reason evidence from Germany is an important contribution to the existing literature.

As already shown in illustration 1 the papers from literature reviews are classified by the way of measuring the takeover wealth gain. In addition to market-based and accounting-based studies, two other categories have been identified.^[25] The third one is a survey of executives where management has to answer the question whether a merger or an acquisition in its own company generates value or not. The forth method is a clinical study that closely evaluates one specific deal.

Another way of organising the existing literature is the perspective from which transaction impacts are viewed. There are three different dimensions.^[26] The first ones are the strategic and the financial perspective which dominated the M&A investigations till 1980. Since then a third dimension, the sociocultural one came to the fore, aims to look closer at employees or culture reactions to transactions.^[27]

Although a mass of research conduct the effect of M&A by using different methodologies, different data bases in terms of geographical aspects or analysing from a different view of perspective, the overall opinion about transactions whether they fail or succeed cannot be answered.^[28]

The following paragraphs deal with market-based and accounting-based measurement studies as this paper is concerned with an analysis of the financial success of M&A measured by short-term returns and long-term operating performance.

2.1 Market-based studies

Since the 1970s, most researchers have believed in market-based measurement studies such as event studies.^[29] Until now, applying the stock return calculation is still the most favourite methodology in literature to investigate the impact of transactions on corporate performance.^[30] In total the results of empirical investigations linking value creation to M&A are inconclusive regarding the combined bidder and target return.^[31] Literature reported small positive, zero or negative returns for the acquiring firm whereas researchers agree that target shareholders receive, on average, statistically significant positive returns.^[32] In comparison to the bidder’s announcement return, the wealth gain for shareholders of target firms is larger and ranges from 20.0 to 30.0 percent.^[33]

In the following, illustration 2 presents important empirical short-term results over time including samples from different countries.^[34] Literature is clustered either by positive or negative results to shareholders.

On the one hand Asquith et al. (1983) analysed the US transaction market from 1963 to 1979 finding evidence that target’s stakeholder gain 16.8 percent and those from the acquiring firm 2.8 percent.^[35] On the other hand during the sample period of 1973 to 1998 of the US market Andrade et al. (2001) concluded that target’s firm abnormal return is around 16.0 percent whereas bidders return is negative with -0.7 percent.^[36] The combined return for bidder and target firm amounts to 1.8 percent.

Illustration 2: Empirical studies investigating the short-term return of M&A activities^[37]

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Franks and Harris (1989) as well as Sudarsanam and Mahate (2003) examined UK companies from 1955 to 1985 and 1983 to 1995. Whereas Franks and Harris (1989) reported 24.0 percent as target’s and 1.2 percent as bidder’s announcement return, Sudarsanam and Mahate (2003) found a negative abnormal return of -1.4 percent for acquirers.^[38]

From the Canadian point of view, Yuce and Ng (2005) as well as Ben-Amar and Andre (2006) found positive abnormal returns for bidders.^[39] Similar results are available for Europe. Campa and Hernando (2004) concluded that the target’s, the bidder’s and both stockholders combined receive positive abnormal returns.^[40] Martynova / Renneboog (2006) illustrate that during 1993 till 2001 target firms created positive announcement returns of approximately 9.0 percent and bidder firms around 0.5 percent.^[41]

2.2 Accounting-based studies

The next important methodology used in the M&A literature is to measure the accounting-based performance.^[42] Empirical literature on accounting-based measurements is controversial as well as the overall conclusion about the short-term announcement return for bidders and targets combined.

A very essential contribution to literature was made by Healy, Palep and Ruback (1992).^[43] It was the first empirical research that tries to find an alternative for the market-based measurement methodology in order to avoid its disadvantages.^[44] Besides this investigation, illustration 3 gives a brief overview of other key studies referring to the post-merger operating performance.^[45]

Illustration 3: Empirical studies investigating the long-term performance of M&A activities^[46]

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Ravenscraft and Scherer (1989) analysed the US transaction market from 1950 to 1977 with the conclusion that tender offers are negatively related to the operating ROA.^[47] In contrast to this, Healy, Palep and Ruback (1992) found for example significant positive changes in asset productivity, asset turnover and operating cash flow return, but no changes in cash flow margins in the sample period of 1979 to 1984 of US companies.^[48] Results from the global study of Gugler et al. (2003) are the improvement in ROAs due to transaction activity and a decline in asset turnovers.^[49] For Europe, Martynova, Oosting and Renneboog (2006) documented no significant post-merger change in profitability, whereas Guest, Bild and Runsten (2010) reported a positive abnormal ROE for the UK.^[50]

3 Transactions

Even though M&A have extensively been studied, academic researchers can still not explain their consequences adequately. The high complexity of takeovers is challenging. Therefore it is necessary to obtain a comprehensive understanding of the nature of transactions which is given in this chapter.

3.1 Fundamentals of transactions

This paragraph defines the different terms regarding M&A issues and describes possible categories of transactions. After this, the deal process is explained in order to give the reader an understanding of the various important time points during a transaction. The last paragraph names reasons why takeovers arise in economy.

3.1.1 The M&A term and basic forms of transactions

The expressions merger or acquisition originated from the US investment banking sector and summarise purchase or sale of companies, business units and participations.^[51] In a broader sense collaborations, such as joint-ventures, are also included. Since the 1980s M&A has also been used intensively in German scientific research.^[52]

Usually a merger is a business combination of two companies with roughly the same size.^[53] In case of an acquisition one company acquires another business, business unit or participation and integrates it into its existing entity. The buyer can either acquire the assets (asset-deal) or the shares (share-deal) of the target.^[54] The decision whether a company is sold or not is made by the shareholders and not by the management. That is why acquisitions can be differentiated by the type of offer. Depending on whether the transaction is made with agreement of the target firm’s management or not, it is a friendly or a hostile takeover.

In addition, usually investments are classified into three types: horizontal, vertical and conglomerate deals.^[55] Whereas in horizontal acquisitions both parties are from the same industry or the same step in the value chain, vertical acquisitions are realised in the up- or downstream value-added stage. A conglomerate transaction assumes that neither the industry nor the step in the value chain matches.

In this study the expressions acquisition, merger, takeover, deals, investment or transaction are used as synonyms.

3.1.2 The M&A process

A merger or acquisition process may take several weeks, months or even years.^[56] In literature there are various descriptions about the ideal process of a transaction.^[57] It is possible to identify three general steps though.

Every M&A process begins with the pre-merger phase including an accurate analysis of the long-term corporate strategy, market analysis resulting in potential target(s) or acquirer profiles and the definition of the aim that should be achieved by the transaction.^[58]

After this step, the actual deal phase begins.^[59] Based on the buyer or seller profile possible companies are searched and contacted. Advisors start with the due diligence process which means that they inspect chances and risks of the selected entity. In case that both sides are interested in the deal, negotiations start more intensely. These can take place before or after the announcement date when both companies publish their upcoming merger or acquisition intention. At the closing date the agreement can be signed because regulatory aspects, such as antitrust issues, are checked. This is the date when the transaction intention is officially approved.

After the closing date the post-merger phase begins with the aim to integrate the target effectively and efficiently into the buyer’s company or – in case of a merger – to combine both entities.^[60] The integration has to be planned precisely. In the end the integration is audited to monitor the success or failure of the transaction.

During the takeover numerous parties are involved in the process or interested in the M&A process. Those are for instance, employees, suppliers, customers, M&A service providers, competitors, banks, governments or organisations of workers or employers, but the classical actors are the buyer and the seller.^[61] The buyer is either a strategic or a financial investor and both have different motives.^[62] This study will only examine the effect of transactions to the shareholders of the target and the acquiring company.

3.1.3 Motives for M&A activities

Reasons why M&A are carried out can be distinguished by two main ideas: value-maximizing and non-value-motives.^[63]

A typical issue of the first group is exploiting synergies.^[64] For instance, synergies can stem from operational improvements due to economies of scale and economies of scope.^[65] While economies of scale represent declining average costs of production by increasing production level, economies of scope occur through the combination of resources in the research and development, production and distribution of numerous products.^[66] Horizontal acquisitions are made to gain economies of scale and vertical acquisitions are helpful to realise economies of scope.

A second cost saving mechanism is the replacement of inefficient management by more competent managers that follow the profit maximising strategy.^[67] Apart from operational synergies, there are financial motivations which refer to lower costs of capital.^[68] This is achieved by reducing the systematic risk of the firm’s portfolio risk for example with the help of conglomerate mergers. Others ways are the use of underutilised tax shields or getting access to cheaper funds due to changing company size.^[69]

The forth important source of synergies is the monopoly power which enables the company to reduce competition and enforce higher prices for customers or lower prices for suppliers.^[70]

Depending on the type of buyer (strategic or financial) M&A can occur due to various reasons. Whereas strategic acquirer are interested in the nature of the business itself and hope to realise synergies due to expansion in existing business areas or diversification in new areas, the financial investors try to generate high returns and sell their acquired share of the target again at a later point.^[71]

The second category, non-value maximising motives occur due to self-interest of the management.^[72] It is probable that managers will try to improve the growth of the firm by acquiring another entity instead of passing the cash flow to shareholders due to salary incentives.^[73] This problem is well known by the term “principal-agent-problem”. Moreover M&A leads to a bigger firm size with the consequence of higher prestige and reduced risk of unemployment for the management.^[74]

Despite the clear isolation of different motives for implementing a transaction, in reality it is usually not possible to observe exactly one reason for the corresponding M&A intention. It is more likely to find multiple reasons that are connected to each other.^[75]

3.2 Key drivers of M&A

As well as the controversial discussion in literature about the wealth creation of M&A on shareholder’s returns or the operating performance, there is no consensus on key determinants influencing the performance of transactions.^[76] Paragraph 3.2.1 and 3.2.2 show the most commonly used drivers that are identified by Datta, Pinches and Narayanan (1992) and the recent study of Hitt et al. (2012).

3.2.1 Determinants by Datta, Pinches and Narayanan (1992)

In their review Datta, Pinches and Narayanan (1992) analysed factors which affect the success of takeovers. They split the factors into five independent variables.^[77] These are regulatory changes, number of bidders, bidder’s approach, mode of payment and the type of acquisition.

Regulatory changes in fields of accounting principles, tax laws or capital market regulations can affect the attitude towards transactions. One suitable example is the regulation of “1968 Williams Amendment”, which required higher information disclosure to increase the competition on the market for corporate control.^[78] According to this, Bradley, Desai and Kim (1988) examine declining returns (+4.0 percent to -3.0 percent) to bidders from the 1960s to the 1980s.^[79]

Next determinant is the number of bidders (multiple or single). This factor represents the competitiveness of the M&A market.^[80] If multiple bidders are available, target’s shareholders can easily set higher requirements and are more likely to gain from this situation, for example by achieving higher bid premiums.

The expression “bidder’s approach” means whether the buyer is interested in a merger or a tender offer (acquisition). The nature of mergers assumes that the acquirer negotiates with the management of the target company. Contrarily, in case of an acquisition the acquirer gives an offer to the target’s shareholders avoiding the management. After signalising a tender offer, other potential candidates may become interested as well and enter the auction process.

The last two variables identified by Datta, Pinches and Narayanan (1992) are used very often, especially in recent investigations.^[81] The mode of payment describes whether the acquisition is cash or stock financed or a combination of both.^[82] In literature some scientists report that shareholders benefit more from cash paid transactions, but other researchers do not find any relationship.^[83] One explanation is that paying with stock takes longer because this has to be accepted by the Securities and Exchange Commission. Researchers suggest that stock financing is an indication for overvalued stocks which would be negative for the shareholders.^[84] At last, a cash payment leads directly to tax implications resulting in higher bid premiums.^[85]

The fifth factor influencing wealth gain is the type of acquisition referring to a related or diversified acquisition. Whereas conglomerate acquisitions can result in cheaper access to capital or lower risk, acquiring an industry-related company can generate economies of scale, economies of scope and market power.^[86] Some studies report a positive association between related acquisitions and business performance, but others did not identify any relationship.^[87]

3.2.2 Determinants by Hitt et al. (2012)

Apart from these five independent variables, Hitt et al. (2012) identified firm size as the most important key factor and furthermore that prior performance and acquisition experience are mostly used during the period of 2004 to 2008.^[88]

The relation of size between target and bidder is essential. On the one hand it is easier for an existing large company to integrate a small entity.^[89] On the other hand a target has to be large enough to be able to influence the acquirer’s performance.^[90]

At the first sight, acquisition experience seems to be positive associated with future merger success because knowledge in M&A helps to avoid prior mistakes and organise future transaction process more effectively and efficiently.^[91] Nonetheless, every acquisition is special and has to be treated individually. Hitt et al. (2012) explains that prior experience might encourage repeating the same decisions or work-flows from former transactions without looking accurately at the present transaction. However, findings in literature are mixed.^[92]

The last determinant mentioned by Hitt et al. (2012) refers to the firm performance prior to an acquisition. Generally, researchers assume for acquirers that a good performance in the past continues in the future.^[93] The economical development of the target is rather an unexplored area. Whereas rare studies examine that acquiring firms are attracted to profitable targets, some find that bidders rather prefer financially weak companies.^[94]

3.2.3 Further relevant drivers of M&A

Besides the seven factors of Hitt et al. (2012) and Datta, Pinches and Narayanan (1992) additional four variables are introduced because these are necessary for the empirical part of this study.

At first, a variable regarding the geographical scope (cross-border or domestic) is applied. Obviously, the integration of a domestic company is likely to be less complex than an international. For instance, wealth gains of international M&A activity can be destroyed due to complications emerging from cultural and governmental disparity.^[95] Nonetheless, a cross-border transaction can be helpful to enter new markets and realise synergies.^[96] Evidences from empirical studies linking domestic and cross-border activities to an increase performance are mixed.^[97]

The second determinant is the mood of takeovers which is either friendly or hostile.^[98] Shareholders from target companies are more likely to realise superior returns in case of a hostile takeover than in an unopposed one. The reasons are that on the one hand hostile acquisitions are more expensive for bidders symbolised by a higher bid premium from which target’s shareholders benefit.^[99] On the other hand for target managers who refuse a bid proposal, literature supposes that they do not maximise shareholder’s value and are afraid of being replaced during or after the transaction process.^[100] In this way, it is easier for the acquiring company to generate shareholder’s wealth through the acquisition. However, assuming higher bid premiums in hostile takeover may lead to declining returns for acquirer’s shareholders because it is more cost intensive than a friendly auction process.^[101] Likewise the findings in literature are inconclusive.^[102]

Furthermore, it might be possible that M&A is more successful in some industry sectors than in others. Therefore it is recommended in the empirical analysis to control for industry-specific differences. For instance, one investigation examined the M&A effect in the American construction industry and reported higher success in the building industry than in the non-building industry.^[103]

The last issues affecting takeover success are macroeconomic conditions. Some researchers argue that in case of high market valuation stocks are overvalued and therefore the deal tends to be overpaid. As a consequence it results in lower long-rung M&A success.^[104] In contrast, in a depression the decision of doing a merger can be interpreted as a very good sign because the company is able to pay for a target although the economic situation is bad.^[105] Thus, it is suggested to control for macroeconomic effects.

3.2.4 The underlying determinants for the empirical study

In order to summarise the results of key determinants influencing the wealth gain of transactions, the twelve factors are divided into two groups: deal specific characteristics and other factors. Illustration 4 demonstrates the division.

The number of bidders, the bidder’s approach, the mode of payment, the type of acquisition, the relative firm size, the mood of acquisition and the geographical scope are factors that are directly connected to the transaction unlike regulatory changes, acquisitions experience, prior performance, industry and macroeconomic conditions which are not deal-specific. Other factors cover external (regulatory changes and macroeconomic conditions) as well as internal (acquisitions experience, prior performance and industry) circumstances.

The empirical part of this study will focus on four deal specific characteristics and two other factors.^[106] These are the payment method (cash or non-cash), the type of acquisition (diversified or related), the mood of acquisition (friendly or hostile), the geographical scope (cross-border or domestic), the industry and macroeconomic conditions.

Illustration 4: Categorisation of key determinants affecting the M&A success^[107]

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3.3 Development of transaction markets

The present paragraph is divided into three subcategories. In the beginning, factors effecting the development of M&A are explained, so that the underlying takeover waves are more comprehensible. The next subparagraph describes briefly the global market of corporate control and the last one conveys basic knowledge about the development in Germany.

3.3.1 Reasons for M&A waves

The fact that transactions occur in waves is well-known.^[108] The market of corporate control starts to rise dramatically in terms of the takeover number until a certain level that will hold for several years till the market falls sharply down again.^[109] However, consistent evidence for M&A waves does not exist.^[110] In research two core drivers for takeover waves and one less relevant factor are mentioned.^[111]

The first one arises from the neoclassical theory. It points out that macroeconomic conditions and industry shocks are possible triggers.^[112] For example, in periods of economic recovery, when interest rates are low and, thus, transaction costs tend to be lower, M&A activities increase automatically.^[113] One contribution from recent literature, Harford (2005), found evidence that economic, regulatory and technological shocks are reasons for wavelike appearance.^[114] Another interesting aspect is that these waves are related to the development of stock market.^[115] After a crash of capital market usually transaction waves ends, too.

In contrast to this, the second category arising from market misvaluation theory argues that M&A activity is driven by market overvaluation.^[116] The buyer hopes to benefit from the purchase of an undervalued company. Rhodes-Kropf and Viswanathan (2004) published a notable study in this area. They analysed time periods of overvalued and undervalued stock market and linked them to M&A waves.^[117] Apart from these two perspectives, sometimes behavioural theory (agency problematic) is mentioned as well.^[118] Managers’ personal interests may spur on M&A waves, as already explained as possible motive for transactions in paragraph 3.1.3.

3.3.2 Development of the global market of corporate control

Since the beginning of the 20th century six completed M&A waves arose in the global market of corporate control. Several investigations tend to differentiate between six M&A waves in the US, four UK waves and three recent European and Asian waves.^[119] Especially Asian firms from India and China intend to reinforce investments.^[120] Following Martynova and Renneboog (2008) this paper describes the six completed transaction waves, where the first two waves are mainly dominated by American companies participating in the M&A process and the fifth and sixth wave represent an international involvement.^[121]

The first wave appeared in the late 1890s in the US. It is called the “Great Merger Wave” which was triggered by the industrial revolution, excess capacity and a continuing prices decline.^[122] Thus, horizontal acquisitions were chosen to avoid falling prices resulting in extensive monopoly structures. During that time numerous huge companies, such a General Electric, Eastman Kodak and DuPont, were established and are still well known nowadays.^[123] The equity market crash in 1904 terminated the ongoing M&A wave.^[124]

The second M&A wave emerged after the First World War in the late 1910s again predominantly in the US.^[125] As a consequence of the monopoly structure founded during the first wave, antitrust regulations were formed to avoid giant conglomerates with monopoly power. Vertical integrations dominated this wave moving the market to an oligopolistic structure. As stock market crashed in 1929, the takeover wave ended as well. During the next four years of worldwide economic depression, many companies that were built in the previous waves disappeared.^[126]

The third wave appeared in the late 1960s and is known as the conglomerate merger wave, even though stricter antitrust regulations existed.^[127] Many investors aimed at diversification, gain from external growth in new product markets and decreasing the earnings volatility.^[128] After the climax in 1968, the wave broke down due to the worldwide oil crises in 1973.

The fourth M&A wave arose in the late 1980s and is called “Merger Mania”.^[129] It was driven by deregulation of monopoly and tax laws which made transactions more attractive to investors. The companies changed their strategic objective and returned to their core competences. Thus, horizontal acquisitions dominated the M&A development. Similar to the other waves, this wave ended after the economic recession which started at the end of the 1980s.

The next transaction wave – the fifth – followed very quickly and began in 1993.^[130] Main features were the technological revolution, the economic globalisation and its stronger focus on the shareholder value.^[131] According to global market orientation, cross-border transactions were preferred and for the first time different countries like Europe and Asia came to the fore instead of US companies. Particularly, the European number of transactions reached almost the US level.^[132] Compared to the other M&A waves, this wave was remarkable concerning the size and geographical scope.^[133]

The sixth wave started in 2002 and had its peak in 2006. It declined since Subprime crisis in 2007 has begun that resulted in a global financial and economic crisis.^[134] A key trigger was the deregulation of the worldwide financial markets aiming for global M&A strategies.^[135] Private-equity investors and hedge funds became more important. In 2007 the transaction volume of European transactions outperformed the number of US mergers the first time.

Since mid-2011, M&A activity seems to have recovered because the number of M&A rose significantly which could indicate the beginning of a new takeover wave.^[136] However, the increase of transactions at the beginning of 2011 was diminished by the growing European debt crisis and the uncertainty of the global economy.^[137]

In general, it is observable during the century of transaction activities that the waves oscillated more and more which means that the difference between the highest and lowest point tends to become greater and appear more often.^[138] Conclusively, it should be noted that domestic and cross-border transactions became an essential part of corporate strategy and thus, future research should further focus on corporate transactions.^[139]

3.3.3 The German transaction market

In comparison to the US or UK the German market for corporate control is less emphasised due to its relative late development.^[140] It started in the mid 1980s when the market began to unfold and ever since have improved consistently.^[141] Meanwhile, M&A activities became an important part of the German economy. Especially spectacular transactions like Thyssen / Krupp, Bayer / Schering, Lufthansa / Swiss, Daimler / Chrysler, Volkswagen / Porsche, Schaeffler / Continental or the mega deal Mannesmann / Vodafone in 2000 aroused foreign investors’ interest in German takeovers.^[142]

[...]

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^[1] See hereinafter Schumpeter, Joseph (2013): Warren Buffett swallows Heinz: Sauce for the sage, 2013, http://www.economist.com/blogs/schumpeter/2013/02/warren-buffett-swallows-heinz, Retrieved on 16.02.2013.

^[2] See Kar (2008), pp. 2 f.

^[3] See Hillier et al. (2010), pp. 788 ff.

^[4] See Martynova / Renneboog (2008), p. 2149.

^[5] See Goergen / Renneboog (2004), p. 10.

^[6] See Wirtz (2012), p. 98.

^[7] For example, Bühner (1991) analysed the German transactions from 1973 to 1985, Hamza (2011) French M&A activities from 1997 to 2005 and Doukas / Holmén / Travlos (2001) Swedish ones from 1980 to 1995.

^[8] See Sudarsanam (2010), p. 15.

^[9] The German Handelsgesetzbuch is more conservative than the US Generally Accepted Accounting Principles or International Financial Reporting Standards. See Cahn / Donald (2010), p. 225.

^[10] See hereinafter Ismail / Abdou, / Annis (2011), p. 89.

^[11] See Tuch / O’Sullivan (2007), p. 142.

^[12] See review papers, such as Tuch / O’Sullivan (2007), p. 143; Martynova / Renneboog (2008), p. 2159, and Bruner (2002), p. 6.

^[13] See Yuce / Ng (2005), p. 117 and Ben-Amar / Andre (2006), p. 537.

^[14] See Ravenscraft / Scherer (1989), p. 115; Gugler et al. (2003), p. 637 and Guest / Bild / Runsten (2010), p. 333.

^[15] See Tuch / O’Sullivan (2007), p. 152 and Martynova / Renneboog (2008), p. 2168.

^[16] Mergermarket is an online database regarding historical M&A transactions.

^[17] See hereinafter Tuch / O’Sullivan (2007), p. 149.

^[18] The time horizon is not exactly defined. However, research became intense since the 1960s and 1970s. See for example Bühner (1991), p. 514, Sudarsanam / Mahate (2003), p. 299, Teerikangas / Joseph / Faulkner (2012), p. 663 and Bruner (2002), p. 48.

^[19] Source: Own illustration according to information from Bruner (2002), pp. 48, 64; Martynova / Renneboog (2008), p. 2152; Ismail / Abdou, / Annis (2011), p. 90; Thanos / Papadakis (2011), p. 104 and King et al. (2004), p. 187.

^[20] See Ismail / Abdou, / Annis (2011), p. 90.

^[21] See Datta / Pinches / Narayanan (1992), p. 67.

^[22] See Datta / Pinches / Narayanan (1992), p. 71 for further information about the method of a meta-analysis.

^[23] See King et al. (2004), p. 187.

^[24] See hereinafter Martynova / Renneboog (2008), pp. 2154-2167. During the second till fourth merger and acquisition wave US companies dominated in the surveys. Since the fourth wave UK firms were more often incorporated and in the fifth wave also European and Asian firms were chosen as data source.

^[25] See hereinafter Bruner (2002), pp. 49 f.

^[26] For more details, see hereinafter Faulkner / Teerikangas / Joseph (2012), pp. 8-13.

^[27] See Faulkner / Teerikangas / Joseph (2012), p. 11.

^[28] See Angwin (2012), p. 44; Ismail / Abdou / Annis (2011), p. 89; Hamza (2011), p. 163 and Tuch / O'Sullivan (2007), p. 141.

^[29] See Bruner (2002), p. 50.

^[30] See Krishnakumar / Sethi (2012), p. 77 and Thanos / Papadakis (2012), p. 118 who found that 47 out of 137 studies reviewed (34.3 percent) apply event studies.

^[31] See Martynova / Renneboog (2008), p. 2153.

^[32] See Spyrou / Siougle (2010), p. 29.

^[33] See Jensen / Ruback (1983), p. 7 reported 30.0 percent return in case of tender offers and 20.0 percent in case of mergers and Datta / Pinches / Narayanan (1992), p. 75 reported a 21.8 percent return.

^[34] A more comprehensive description of previous investigations regarding the short-term effects around M&A announcement, see for instance Martynova / Renneboog (2008), p. 2154-2158.

^[35] See Asquith et al. (1983), pp. 137 f.

^[36] See hereinafter Andrade et al. (2001), p. 110.

^[37] Source: Own illustration according to information mainly from Martynova / Renneboog (2008), pp. 2154-2157.

^[38] See Franks / Harris (1989), p. 237 and Sudarsanam / Mahate (2003), p. 315.

^[39] See Yuce / Ng (2005), p. 117 and Ben-Amar / Andre (2006), p. 537.

^[40] See Campa / Hernando (2004), pp. 65 f who reported 3.9 percent for target, 0.4 percent for bidders and 1.0 percent for both.

^[41] See Martynova / Renneboog (2006), p. 31.

^[42] See Thanos / Papadakis (2012), p. 119 who revealed that 28 out of 37 studies reviewed (20.4 percent) rely on accounting-based measurements.

^[43] See Ghosh (2001), p. 151.

^[44] See Feroz / Kim / Raab (2005), p. 86 and paragraph 4.3 that presents the weaknesses and strengths of each method.

^[45] A more comprehensive description of previous investigations regarding the post-merger operating performance, see for instance Martynova / Renneboog (2008), pp. 2165 f.

^[46] Source: Own illustration according to information mainly from Martynova / Renneboog (2008), pp. 2165 f.

^[47] See Ravenscraft / Scherer (1989), p. 115.

^[48] See Healy / Palep / Ruback (1992), p. 154.

^[49] See Gugler et al. (2003), p. 637.

^[50] See Martynova / Oosting / Renneboog (2006), p. 3 and Guest / Bild / Runsten (2010), p. 333.

^[51] See hereinafter Müller-Stewens (2010), p. 4.

^[52] See Corsten (2008), p. 533.

^[53] See hereinafter Goergen / Renneboog (2004), p. 13 and Ravichandran (2009), p. 1.

^[54] See hereinafter Müller-Stewens (2010), p. 4 and Kar (2008), p. 2.

^[55] See hereinafter Hillier et al. (2010), p. 786.

^[56] See Datta / Pinches / Narayanan (1992), p. 68.

^[57] See Jansen (2008), p. 249 and Wirtz (2012), p. 116.

^[58] See Corsten (2008), p. 534 and for further explanations see Jansen (2008), pp. 250-264.

^[59] See Corsten (2008), p. 534 and for further explanations see Jansen (2008), pp. 265-318.

^[60] See Corsten (2008), pp. 534 f and for further explanations see Jansen (2008), pp. 318-336.

^[61] See Bruner (2002), p. 49 and Wirtz (2012), pp. 104 f.

^[62] See Bitterer (2010), pp. 23 f and paragraph 3.1.3 for further information.

^[63] See Franks / Harris (1989), p. 226; Halpern (1983), p. 299 and Gerpott (1993), p. 64. Another notable categorisation is the conceptual approach of Trautwein (1990) who identified seven different motives (efficiency, monopoly, raider, valuation, empire-building, process and disturbance theory). The present study only describes one approach.

^[64] See Martynova / Renneboog (2006), p. 9.

^[65] See Martynova / Renneboog (2006), p. 9 and Trautwein (1990), p. 284.

^[66] See hereinafter Halpern (1983), p. 299 and Hillier et al. (2010), p. 788.

^[67] See Halpern (1983), p. 300 and Hillier et al. (2010), p. 789.

^[68] See hereinafter Trautwein (1990), p. 284.

^[69] See Trautwein (1990), p. 284 and Hillier et al. (2010), pp. 789 ff.

^[70] See Devos / Kadapakkam / Krishnamurthy (2009), p. 1184.

^[71] See Bitterer (2010), pp. 23 f and Balz (2009), pp. 12 f.

^[72] See Halpern (1983), p. 299.

^[73] See Jensen (1986), p. 323.

^[74] See Gerpott (1993), p. 64.

^[75] See Angwin (2007), pp. 93 f and Brouthers / van Hastenburg / van den Ven (1998), p. 349.

^[76] See Ismail / Abdou, / Annis (2011), p. 101.

^[77] See hereinafter Datta / Pinches / Narayanan (1992), p. 69.

^[78] See Datta / Pinches / Narayanan (1992), p. 69 and Franks / Harris (1989), p. 227.

^[79] See Bradley / Desai / Kim (1988), p. 13.

^[80] See hereinafter Datta / Pinches / Narayanan (1992), pp. 69 f.

^[81] See Hitt et al. (2012), pp. 75 f who reviewed studies from 1983 to 2008 and found among other things that for the period 2003 to 2008 the type of acquisition (diversification or relatedness) and the method of payment (stock or cash) are the second and the third most common independent variables.

^[82] See hereinafter Datta / Pinches / Narayanan (1992), pp. 70 f.

^[83] See Travlos (1987), p. 961; Walker (2000), p. 63 as examples for a positive relation and Heron / Lie (2002), p. 146 and King et al. (2004), p. 195 as examples without any evidence.

^[84] See Travlos (1987), p. 961 and Hitt et al. (2012), p. 74.

^[85] See hereinafter Datta / Pinches / Narayanan (1992), pp. 70 f.

^[86] Compare with paragraph 3.1.3.

^[87] See Bruner (2002), p. 65 linking related acquisitions to M&A success and King et al. (2004), p. 195 as an example with no findings.

^[88] See hereinafter Hitt et al. (2012), pp.73 ff.

^[89] See Tuch / O’Sullivan (2007), p. 158.

^[90] See Bruner (2002), p. 56.

^[91] See hereinafter Hitt et al. (2012), pp. 73 f.

^[92] See for instance Haleblian and Kim (2006), p. 367 who reported a positive link between prior experience and future merger performance. Opposite findings are available from Kusewitt (1985), p. 162.

^[93] See hereinafter Hitt et al. (2012), pp. 74 f.

^[94] See Vermeulen / Barkema (2001), p. 469 and Bruton / Oviatt / White (1994), p. 986.

^[95] See Martynova / Oosting / Renneboog (2006), p. 6.

^[96] See Moeller / Schlingemann (2005), p. 534 and pp. 537-540 for a detailed explanation why a cross-border effect may exist.

^[97] See Ekkayokkaya / Holmes / Paudyal (2009), p. 466 and Harris / Ravenscraft (1991), p. 836 who found that cross-border transactions improve corporate performance more significantly. In contrast, see Moeller / Schlingemann (2005), p. 561 and Goergen / Renneboog (2004), p. 24 who found opposite evidence.

^[98] See hereinafter Tuch / O’Sullivan (2007), p. 152.

^[99] See Martynova / Oosting / Renneboog (2006), pp. 4 f.

^[100] See Jensen (1993), p. 848 and hereinafter Healy/ Palepu / Ruback (1997), p. 50.

^[101] See Tuch / O’Sullivan (2007), pp. 152, 155.

^[102] Whereas Walker (2000), p. 63 found negative abnormal returns in friendly transactions, Goergen / Renneboog (2004), p. 20 revealed a decline in hostile takeover bids.

^[103] See Choi / Russell (2004), p. 524.

^[104] See Bouwman / Fuller / Nain (2009), pp. 634 f.

^[105] See Beltratti / Paladino (2011), p. 7.

^[106] These six determinants are chosen because of data availability and the importance stated in literature by Datta / Pinches / Narayanan (1992) and Hitt et al. (2012).

^[107] Source: Own illustration. Factors presented in bold are used in the empirical part of this study.

^[108] See Martynova / Renneboog (2005), p. 2.

^[109] See Kolev / Haleblian / McNamara (2012), p. 20.

^[110] See Makaew (2012), p. 1.

^[111] See Kolev / Haleblian / McNamara (2012), pp. 25, 29 and Makaew (2012), p. 1.

^[112] For a more comprehensive statement, see Kolev / Haleblian / McNamara (2012), pp. 25-28.

^[113] See Blättchen / Wegen (2003), p. 2; Harford (2005), p. 530 and Martynova / Renneboog (2005), pp. 2 f.

^[114] See Harford (2005), p. 529.

^[115] See hereinafter Müller-Stewens (2009), p. 32.

^[116] See Bauer (2012), pp. 21 ff and hereinafter Kolev / Haleblian / McNamara (2012), pp. 28 f.

^[117] See Rhodes-Kropf / Viswanathan (2004), p. 2710.

^[118] See Martynova / Renneboog (2005), pp. 2 f and Kolev / Haleblian / McNamara (2012), pp. 29 ff.

^[119] See Sudarsanam (2010), pp. 16-30 who summarise the UK, US and European development from 1890 to 2007.

^[120] See Jansen (2008), p. 62.

^[121] See Martynova / Renneboog (2008), p. 2149 who emphasizes that this division may also result from the good data availability of US mergers since the early 1990s.

^[122] See Martynova / Renneboog (2008), p. 2149 and Wirtz (2012), p. 96.

^[123] See Sudarsanam (2010), pp. 16 f.

^[124] See Martynova / Renneboog (2008), p. 2149.

^[125] See hereinafter Wirtz (2012), p. 96; Martynova / Renneboog (2008), p. 2149; Sudarsanam (2010), pp. 17 f and Kolev / Haleblian / McNamara (2012), pp. 21 f.

^[126] See Sudarsanam (2010), p. 18.

^[127] See Wirtz (2012), p. 97 and Betton / Eckbo / Thorburn (2008), p. 5.

^[128] See Sudarsanam (2010), p. 18 and Martynova / Renneboog (2008), p. 2150.

^[129] See hereinafter Wirtz (2012), p. 97 and Martynova / Renneboog (2008), pp. 2150, 2152.

^[130] See Wirtz (2012), pp. 97 f; Sudarsanam (2010), p. 21 and Martynova / Renneboog (2008), p. 2152.

^[131] See Kolev / Haleblian / McNamara (2012), pp. 23, 25 and Martynova / Renneboog (2008), p. 2152.

^[132] See hereinafter Martynova / Renneboog (2005), p. 2 and Goergen / Renneboog (2004), p. 10.

^[133] See Martynova / Renneboog (2005), p. 2.

^[134] See Jansen (2008), p. 69.

^[135] See hereinafter Wirtz (2012), pp. 98 f.

^[136] See Wirtz (2012), pp. 100 f and Bauer (2012), p. 24.

^[137] See Müller (2013), p. 52.

^[138] See Müller-Stewens (2009), p. 32.

^[139] See Wirtz (2012), p. 102.

^[140] See Bitterer (2010), p. 26.

^[141] See Müller-Stewens / Spickers / Deiss (1999), p. 7 and hereinafter Kunisch (2010), p. 48.

^[142] See hereinafter Kunisch (2010), p. 48 and Blättchen / Wegen (2003), p. 4. For a detailed summary about the single transactions, see Kunisch (2010), p. 66-69.