Controlling the Results of Mergers and Acquisitions - Methods for Measuring the M&A Success

Term Paper (Advanced seminar), 2004

40 Pages, Grade: 1,0









5.1.2 CAPITAL MARKET ORIENTED CONTROL OF SUCCESS Abnormal Returns Market Capitalization Assessment of the Capital Market Oriented Control of Success





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Many companies pursue a growth strategy by executing acquisitions. But in recent years they have seen too many publications showing that M&A failure ratios exceed success ratios.

In this paper it is examined which methods can be applied for measuring the M&A success and reasons, why these studies concluded in negative results, are given.

- For measuring the success of M&As, the definition of objectives, the company wants to achieve by acquiring, is essential. In general, the overall goal is to create shareholder value though each acquiring company has its own specific secondary goals. Within this paper these secondary goals are divided into the financial dimension (e.g. synergies), HR dimension (e.g. gaining key personnel) and market strategic dimension (e.g. gaining market share).

- Before measuring the M&A success, some general problems which affect all evaluation methods have to be considered. The first problem refers to the period of measurement. It is difficult to find the adequate period as it considerably differs amongst the various evaluation methods. For a meaningful M&A evaluation, it is agreed upon measuring the success about three years after the deal. The second problem refers to the comparison of measurement results. For a realistic view, the results should not only be observed before and after the transaction but as-if figures of the single entities, in case of not having merged, should be considered. In addition, the comparison of the results with those of a peer group and with the set objectives has to be carried out.

- The first method to measure M&A success is the objective evaluation model which can be subdivided into the annual accounts oriented method, the capital market oriented method and the event oriented method. The annual accounts method considers various ratios out of the external accounting system (e.g. RoE). It is rather a past-oriented method.

The capital market method implies on the one hand abnormal returns which represent the difference between the share price expected before the acquisition and the actual share price afterwards (calculated by CAPM and Market Model). On the other hand, the calculation of the Market Cap can be used as an easy tool to measure M&A success. These methods give a prospect for future developments and analyze the success from the shareholders’ point of view.

The event method includes disinvestment ratios (reselling the acquired unit) and fluctuation ratios to evaluate the M&A transaction. This method is rather not an appropriate indicator for measuring the economic success but is closely linked to the respective objective of an acquisition.

- The second method to measure M&A success is the subjective evaluation method which includes questionings of people involved in the M&A process (managers, employees, internal and external experts). This method is especially important for measuring the success of the integration process and, although not useful as an isolated assessment, it makes a valuable contribution to the evaluation of the M&A success.

The various methods can lead to different results, therefore general statements about success or failure of M&A deals can only be made under reserve. Important aspects (e.g. distortion of study results due to large loss deals) were not considered. According to recent (more sophisticated) studies, M&As are able to generate value and growth under the right circumstances.



There is hardly any other term that attracted as much attention in the economy during recent years as the one of “Mergers & Acquisitions”. More and more companies tried to grow and to expand their business by external growth strategies like by merging or acquiring. But during the recent years also the shady sides of the M&A business appeared. Many empirical studies showed for example failure ratios of about 50% - 80%. Studies that support these failure ratios are for example studies of McKinsey1 (1984): >66%, Porter (1987): 61%, Kitching2 (1974): 50%, Jansen/Körner3 (2000): 78,5% and BCG (2003): 61%. All in all, the success probability of M&As can be summed up with a 40:60 formula according to Jansen (2000).

Now the questions arises, how these studies measured the success of M&A deals and if the results are really significant.

As well the management as the employees and shareholders have a justifiable interest to see afterwards if the acquisition was a success. Therefore it is important that the result of the evaluation is reliable as due to this result further strategic decisions will be taken. The fact, that the practical application often leads to different results depending on the evaluation method used, shows that success measurement includes some problems and it cannot be carried out easily.

The objective of this paper is to give an overview of the different evaluation methods used for measuring the M&A success and to analyse them critically.


In this paper, firstly the objectives which companies pursue by acquiring or merging4 are examined. Furthermore, the different evaluation methods to control the M&A success are presented and their advantages and disadvantages are pointed out.

For that purpose, it is first of all necessary to define what is actually meant by the term “success”. After that, the objective of increasing shareholder value will be regarded as the overall goal while the financial, social and market strategic dimensions are considered to be secondary goals.

In the following two chapters, the period of measurement and the comparability of the measurement results are contemplated as possible problems within a success analysis.

The main part of this paper deals with the different methods of measurement which are divided into the objective and subjective evaluation methods. Within the objective methods, it is distinguished between the annual accounts oriented method, the capital market oriented method and the event oriented method. The subjective method consists of the questioning of different parties involved in the M&A process (managers, employees, internal and external experts).

Finally, the presented issues are concluded and an outlook is given.



Success in general is defined as reaching a certain goal. Therefore it is important to know which objectives the company wants to reach by executing an acquisition. Considering this, it is clear that there is a high degree of subjectivity involved concerning the definition of acquisition success because the goal of one acquisition can completely differ from another. For example a Japanese manufacturer’s goal is to become a new global player, therefore they acquire a U.S.-distributor at a price that is considered much too high by his American competitors. However, for the Japanese manufacturer this acquisition was a success because, as the entry into the U.S. market is prerequisite for competing in the world market, they do not only evaluate the possible earnings from the U.S. market but the overall possible global earnings (Clark, 1991; Bamberger, 1994).

In general you can say that goals in conjunction with acquisitions, are normally the objectives of the management of either the acquirer or the acquiree or both. The objectives of other stakeholders e.g. employees, suppliers or customers, are usually not considered. The reason being that the management makes the decision whether the acquisition takes place or not. (Gerpott, 1993).

As the importance of the company’s objectives for evaluating the M&A success gets more obvious, the main objectives of mergers and acquisitions will be presented in the following chapters, whereas the goal of creating shareholder value is an overall goal and therefore valid for all other objectives as well. The other objectives can be seen as secondary goals.

An important part affecting all the objectives of an M&A is realizing synergies. Synergies are often defined as a “2+2=5 - effect” which means that a merged firm produces better results than its single parts would produce if they remained independent entities. Synergies can be realized in different fields which will be shortly explained in chapter 2.2.1.


Almost all authors in the specialist literature agree upon the overall goal of M&As to create shareholder value.

Referring to the classical point of view, the main goal of companies in the freeenterprise system is long-term profit maximization (Wöhe, 2002). According to Bamberger (1994) there are three reasons why this point of view could be maintained for a relatively long time:

- It is a concrete goal and therefore it can be easily controlled.

- It leads to construction of simple and formal models for quantitatively assessing the behaviour of the company.

- The profit is prerequisite for the existence of the company and therefore other stakeholders like employees, creditors or customers are interested in the goal of profit maximization.

Later on, other goals which consider more of the interests of all parties involved became important, e.g. better working conditions for the employees (Æ stakeholder approach) (Bamberger, 1994; Wöhe, 2002). But nowadays, one can see that increasing the value of a company and thereby increasing the shareholder value is the most important goal. Reason for this development back to this single goal could be the boom of mergers and acquisitions starting in the late eighties, especially the increase of hostile takeovers because the best measure to repulse a hostile takeover is to increase your company’s value. Furthermore, owners are continually more interested in the optimal usage of their money and thereby in the maximization of their profits (Bamberger, 1994).

Now the question comes up if the goals of the stockholders are more important than the goals of the other stakeholders. In the majority of the literature this question is answered in the affirmative5:

“Stockholders are commonly portrayed as one group in a set of equal constituencies, or ‘stakeholders’, of the company. In fact, stockholders are not equal with these other groups because they are the ultimate holders of the rights to organization control and therefore must be the focal point for any discussion concerning it.” (Jensen, 1984: 110)

In this paper it is agreed that increasing shareholder value is the overall goal of mergers and acquisitions, but each merging company has usually several different secondary goals (which in the end, if realized, will usually lead to an increased shareholder value). Therefore the success of an M&A can not only be controlled by measuring the increase or decrease of the shareholder value of the newly created company. It also has to be considered if the other objectives of the acquisition were reached. Thus, the following three chapters will deal with these secondary goals of mergers and acquisitions. A summary of possible objectives can be found in table 1 in the appendices.


Concerning the financial goals of an M&A, the financial synergy effects play an important role.

-ne has to distinguish between economies of scale and economies of scope. Economies of scale means that the cost per unit decreases as the quantity of units produced increases. Whereas economies of scope are cost advantages that result from an increasing variety of products due to a combination advantage (Verbundvorteil). A prerequisite is the joint usage of resources like production facilities, technologies or distribution channels. By this joint usage a reduction of the overhead costs can be reached. For example, a company’s management structure, administration systems and marketing departments are capable of carrying out these functions for more than one product. Warehouse facilities may be used to maximum advantage by storing a range of the company’s product lines.

According to a KPMG study (2003), there are three main areas within the dimension of synergies in which directors of companies participating in M&A deals are expecting major benefits: savings in operational costs, savings in overhead costs and revenue benefits. The proportion of the expectations within these areas is the following:

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The first two kinds of synergies are reducing the company’s costs e.g. reduction of personnel costs due to lay-offs (=operational costs), while revenue benefits refer to the increase of e.g. turnover. According to a KPMG study (2003) cost reductions are more easily achieved but especially the revenue benefits are more likely to enhance value. For further information about synergies please see paper No. 16 and 17.


The companies are nowadays forced to adapt themselves to the ever-changing competitive environment. Especially in industries where technical knowledge is developing fast, it is more and more important to have access to already existing potentials.

“A merger or acquisition may be the most appropriate means to attain some sorts of knowledge or competence. This is particularly the case when the knowledge is not widely available … . …. Merger or acquisition has the additional advantage that, once acquired, no competitor can attain this exact same competence.”(Helleloid/Simonin (1994) in: Schäfer, 2001: 4).

An objective of an acquiring company can be, for example, the gaining of key personnel. So they concentrate especially on changes in the area of HR within the new company and therefore need to consider the learning curve6 and the measurement of employee related ratios like the fluctuation ratio after the merger (see 5.1.3). The interests of the employees, their satisfaction and their identification with the new company are furthermore to consider. Within this dimension (Human Resource) it is mainly concentrated on the so called “soft factors” (Jansen/ Petersen, 2000).

-ne example for acquiring a company’s key personnel can be that a certain technical know-how and qualified personnel is needed for realizing a company’s strategy. If this technical competence is not reachable within the company, it can be only achieved in connection with another company which has the technological and personnel advantage.

If a company, taking part in an acquisition, has the special goal to gain key personnel, it becomes clear that they need a low fluctuation ratio, meaning they have to try hard to keep this key personnel in the new company.


The dimension of market strategic positioning defines the success of a company over a long-term positioning in the respective market and the competitive environment. In this connection, M&As are successful if afterwards e.g. a significant increase of the relative market share can be observed. According to a KPMG study (2003) 31% of the questioned directors participating in major M&A deals define the increase or the protection of their market share as their main objective of the transaction. Further strategic objectives can be, for example, the gaining of new geographic markets or diversifications.


1. ThyssenKrupp Automotive

They have set strategic goals for protecting their future and for enlarging their international market positioning. To translate them into action they carried out acquisitions with turnovers to the amount of €223 million by now. By acquiring the French Sofedit S.A, Saint-Quentin-en-Yvelines and the planned acquisition of Mercedes- Benz Lenkungen GmbH, Düsseldorf, ThyssenKrupp Automotive opens up new markets, new customers and further innovative fields of technology for their core business.

one of their goals is a turnover increase by further strategic acquisitions, especially the extension of their presence in Asia, mainly China and Japan and the transplants in the USA and Europe (, 2003).

2. DHL

DHL took over the express service provider Airborne, Inc. and disposes now of a dense transport network in the USA, the biggest express market in the world. Owing to the acquisition of the express and package service provider Mayne Logisitcs Loomis, DHL advanced to position no. three in the Canadian market. To strengthen their position in Central America, DHL increased their shares of the logistic provider Corporación Cormar, S.A. to 100% in July 2003.

So, it is obvious that DHL’s specific goal in acquiring other companies is to

strengthen their market position towards their competitors

(, 2003).

3. Voestalpine-Division Bahnsysteme

After having carried out acquisitions in North America, the Division Bahnsysteme became the market leader in switches in North America. Their next step is to acquire (together with the British Balfour Beatty) the French company Manoir Industries, the most important manufacturer of “Manganherzen” (a special component of a switch). Therefore, Voestalpine does its first step into the French market and besides they achieve the clear market leadership in Europe concerning “Manganherzen”.

So, an acquisition’s sub-objective can be the opening up of new markets and the achievement of market leadership (, 2003).


For measuring the M&A success it is first of all necessary to think about the appropriate period of measurement.

Choosing this adequate measuring period is another main problem of all evaluation methods (presented in chapter 5). In this, the question arises from which date on the success of an M&A transaction is visible and therefore measurable. These problems are not yet solved in the empirical research and no common consensus is found by now.

Each study uses different measuring periods, respectively dates, which complicates the comparison of the different results considerably (see chapter 4) . The periods used can differ from one day to eight or more years. It is hardly possible to define the ideal period of time, which shows if an M&A transaction was successful or not. You will see within this paper that the choice of the right period or date depends as well on the based dimension of success (objectives) as on the evaluation method used.

For example, short- term, date related measurements, the so called “Event-Studies” (see abnormal returns in chapter 5.1.2) are applied within capital market oriented analyses, whereas annual accounts ratios are usually observed over a longer period of time. Most decisively is that within one empirical study, one common period is chosen to avoid distortion of the results and wrong conclusions, which are often disregarded.

Concentrating on the question of the date on which the organisational changes due to the acquisition have usually finished (so the integration in the main is finished), the data in literature can vary between two to five years.7

The reason for this rather long period of time is that the process of adapting the different corporate cultures as well as the interactive learning processes are very time intensive as can be seen in the following study:

AMA study of 109 US companies in 1989:

How long a time must pass before success of a merger or acquisition can be properly measured

- Only 34,9% said that a significant measurement of success during the first two years after an acquisition was possible.

- 65,1% ascertained that a valid measurement needed more than two years

(about three years)

(American Management Association (1989) in: Gerpott, 1993)

Within this long-term evaluation there also arise problems, for example, the changing perception of the people involved in the M&A transaction (if the subjective evaluation method is used) or the influence of other events on the company’s success (if a objective evaluation method is used).

However, in general it can be said that adequate to the dynamic process of integration, the evaluation of success should be carried out on various dates after the announcement. “A longitudinal perspective would be most desirable, since M&As unfold over time. … It is important to systematically track events and consequences as they unfold.” (Schweiger/ Ivancevich (1987) in: Gerpott, 1993: 234)


Analysing the results of success measurement, one faces another elementary problem independent of the way and method of examination, namely the comparison of the results.

What was often done in the past is the isolated consideration of results, which concluded that the new company developed better or worse than the two single companies before (Jansen/ Petersen, 2000). The result of a before/after comparison seems to be meaningful because it confirms the success or failure of an M&A transaction and therefore answers the starting-question of the analysis in a satisfactory way. But the development of the two single entities, in case of not having merged, should be taken into consideration. This is problematic because it is just an assumption of future values.

In addition, the results of the M&A success analysis have to be cross-checked with the defined objectives.

However, an isolated view is only useful to a certain extent as an additional comparison with, for example, similar transactions is required. So the absolute development is not only decisive but the relative performance of the concerned success ratios. To find out concrete results it is necessary to carry out a benchmark comparison by using peer groups to make it obvious how much the success differs from the competitive environment. For example a KPMG study (2003) also measures shareholder value in comparison to that of the peer companies. In this respect, it is however problematic to choose an adequate index. It is on the one hand difficult to find a peer group for mega-mergers and on the other hand they influence the index when they are used in the peer group. This requires a complicated settlement of the index (Indexbereinigung) (Jansen/ Petersen, 2000).


Concerning mergers and acquisitions there are many different methods of evaluation but still the discussion which of these methods is the most appropriate one is not yet finished:

“Indeed, despite myriad efforts devoted to empirical evaluations of post-combination performance, there is considerable disagreement concerning appropriate methodologies, performance data, and outcomes for analysis.”(Buono/Bowditch, 1989: 238)

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In the following chapters the mostly used methods for evaluating an M&A transaction are presented. One can distinguish between the firstly presented objective methods which include the annual accounts oriented method (see chapter 5.1.1), the capital market oriented method (see chapter 5.1.2) and the event oriented method (see chapter 5.1.3) and the secondly presented subjective method which include questionings (see chapter 5.2.1).

The usage of these two methods can be observed in a recent KPMG study (2003).


5.1.1 ANNUAL ACCOUNTS ORIENTED CONTROL OF SUCCESS (Jahresabschlussorientierte Erfolgskontrolle):

-ne method to control the result of mergers and acquisitions is the annual accounts oriented method. This approach uses figures out of the balance sheet and the profit and loss account to measure the success of an acquisition. It permits to get an overview of the assets and the financial situation as well as of the income situation of the company and thereby makes it possible to assess the success of the acquisition considering both - the financing-related and the income-related figures (Wirtz, 2003).

This information out of the external accounting system (externes Rechnungswesen) is the basis for creating ratios. There is a large variety of different ratios whereas the following ratio groups are mostly used:

- Profitability ratios for example the Return on Equity

- Figures concerning for example the turnover, the net income, the profit or the cash-flows

For measuring the success of M&As you need other ratios with which yours can be compared as already mentioned in chapter 4. There are three categories for this comparison:

- Control groups consisting of chosen companies o Average figures of the industry

- Before/After comparison Æ comparison with existing ratios of the acquiring company before the realization of the acquisition

(Bamberger, 1994, Schäfer, 2001)

The annual accounting oriented analysis shows the real financial success effect whereas the majority of the capital market oriented studies just considers the expectations concerning the future success development. This can be regarded as positive but there are also negative issues: All the expected future returns are not taken into account although they have a strong impact on the evaluation of the M&A transaction (Schäfer, 2001; Gerpott, 1993).

In addition, the annual accounts oriented studies only examine the success effect of the acquiring company and do not consider the property growth of the acquired company’s former owners and therefore it can not demonstrate that the overall value increase of both companies. Furthermore, it is criticized that it is not possible to assign the various actions of the M&A transaction to the corresponding success effect. The problem grows when the analysis period is extended because now other events (e.g. other acquisitions or other changes in the field of competition) are influencing the success effect of the M&A. There are further problems resulting from the nature of accountancy: Firstly, due to the “Ansatz- und Bewertungswahlrechte”, the management has the possibility to influence the book-keeping profit. With this possibility to manipulate, the annual accounts oriented method loses its objectivity because if every company has different criteria to calculate the profit, the companies’ profits cannot be compared with each other. Secondly, the ratios out of the accounting system ignore potential changes in the systematic risk, although this change can have a huge impact on the benefit of the shareholder. (Gerpott, 1993; Schäfer, 2001; Wirtz, 2003)

Another problem emerges concerning the comparison of a company’s ratios before and after the acquisition (Æ before/after comparison, see chapter 4) because to evaluate the M&A transaction correctly the post-merger performance should not be compared with the pre-merger performance but with the hypothetical post-merger performance if the merger or acquisition had not occurred (Bamberger, 1994; Schäfer, 2001; Wirtz, 2003).

5.1.2 CAPITAL MARKET ORIENTED CONTROL OF SUCCESS (Kapitalmarktorientierte Erfolgskontrolle)

Another method to control the success of mergers and acquisitions are capital market oriented analyses. Within these analyses one can distinguish between short- term control of success and long-term evaluation of an M&A activity, although the methods for both periods are in practice interchangeable. The short-term analyses investigate the reaction of the capital market on a certain event like an acquisition or a merger.8 In this connection the change in the shareholder value is measured by the so called abnormal returns. These capital market oriented approaches are therefore almost exclusively used for short-term evaluations of an acquisition because they just investigate the reaction of the capital market around the announcement date On the other hand, the long-term analyses try to measure the actual post-merger performance. Usually, the share price of the acquiring company is used as a performance-indicator9. By taking the share price as performance indicator, the Market Cap of the newly created company can be calculated.

(Bamberger, 1994; Bouwman,2003; Gerpott, 1993; Schäfer, 2001; Wirtz, 2003). ABNORMAL RETURNS

To measure the short-term announcement effect of an acquisition on the share price, the expected daily price is compared with the actual share price. The difference between the actual return of a certain day and the return predicted for that day is the abnormal rate of return. These abnormal returns can be either positive or negative (DePamphilis, 2001; Gerpott, 1993; Wirtz, 2003). In table 3 in the appendices the abnormal returns on the announcement day of various bank acquisitions are shown.

Considering this, it is clear that all capital market oriented analyses for measuring the success of M&As (short- and long-term evaluations) can only be used for quoted companies.

There are different models10 to calculate these abnormal returns but only two of them will be presented in this paper. The fundamental assumption of both models is the linear connection between the return of a share Ri and the return of the market Rm. Furthermore, it is assumed that the capital markets are capable of processing (verarbeiten) new information efficiently11. That means that all market participants can adequately reflect the future effects of the acquisition. The capital market oriented model also works from the assumption that there is a dominance of the interests of the shareholders with regard to the other stakeholders (Gerpott, 1993; Schäfer, 2001; Wirtz, 2003).

- Capital Asset Pricing Model (CAPM):

The CAPM suggests that the returns R of a share i in a period of time t depends upon the risk-free rate, the systematic risk and a risk-premium that reflects the risk the investor faces by holding a share instead of a long-term government bond.


1 Figure was found in Clark (1991).

2 Figure was found in Bamberger (1994).

3 Figure was found in Jansen (2000). The ratio of 78,5% includes all M&As that did not enhance value.

4 The terms „Acquisition“ and „Merger“ are used interchangeable within this paper. 2

5 See e.g. Bamberger (1994); Gerpott (1993); Jensen (1984). 4

6 For further information about the learning curve see table 2 in the appendices. 5

7 most often 3 years, in studies of e.g. Cartwright/ Cooper (1990), Buono/ Bowditch (1989). 7

8 These investigations are called „event studies“ and can be defined as follows: “Empirical examination of an occurrence that causes investors to change their expectations regarding the discounted future cash flows of a stock” (Mitchell, 1991).

9 In some cases the ‘total return to shareholders’, which in addition to the share price also considers the distributed dividends, is used (e.g. study of BCG, 2004b).

10 Models for calculating the abnormal returns: CAPM, Marktmodell, Industriebereinigtes Marktmodell, Logarithmiertes Marktmodell, Empirische Kapitalmarktlinie, Durchschnittsbereinigte Renditen, Marktbereinigte Renditen (Bühner, 1990b).

11 The total information transparency is one assumption of the perfect market. For a detailed overview on the other conditions of a perfect market see Wöhe (2002), p. 497.

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Controlling the Results of Mergers and Acquisitions - Methods for Measuring the M&A Success
Heilbronn University of Applied Sciences
Spezielle BWL - M&A
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37 pages including 11 pages of appendix and bibliography
Controlling, Results, Mergers, Acquisitions, Methods, Measuring, Success, Spezielle
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Charlotte Walz (Author)Carmen Hickl (Author), 2004, Controlling the Results of Mergers and Acquisitions - Methods for Measuring the M&A Success, Munich, GRIN Verlag,


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