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. 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.
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 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.
Table of Contents
1 INTRODUCTION
1.1 PROBLEM STATEMENT AND OBJECTIVES
1.2 PROCEDURE
2 OBJECTIVES OF MERGERS AND ACQUISITIONS
2.1 DEFINITION OF SUCCESS
2.2 SHAREHOLDER VALUE
2.2.1 FINANCIAL DIMENSION
2.2.2 HUMAN RESOURCE DIMENSION
2.2.3 MARKET STRATEGIC DIMENSION
3 THE PERIOD OF MEASUREMENT
4 THE COMPARISON OF MEASUREMENT RESULTS
5 METHODS FOR MEASURING THE SUCCESS OF AN M&A
5.1 OBJECTIVE EVALUATION METHODS
5.1.1 ANNUAL ACCOUNTS ORIENTED CONTROL OF SUCCESS
5.1.2 CAPITAL MARKET ORIENTED CONTROL OF SUCCESS
5.1.2.1 Abnormal Returns
5.1.2.2 Market Capitalization
5.1.2.3 Assessment of the Capital Market Oriented Control of Success
5.1.3 EVENT ORIENTED EVALUATION METHOD
5.2 SUBJECTIVE EVALUATION METHOD
6 CONCLUSION
Goal and Research Focus
This paper aims to provide a critical overview and analysis of the various methods used to measure the success of Mergers and Acquisitions (M&A). Given the high failure rates reported in empirical studies, the research examines how success is defined and measured, focusing on the discrepancy between objective financial metrics and subjective stakeholder assessments.
- Analysis of M&A objectives, with a primary focus on shareholder value creation.
- Evaluation of objective measurement models, including annual accounts, capital market-oriented approaches, and event-oriented methods.
- Examination of subjective evaluation methods involving the questioning of internal and external experts.
- Critical review of measurement challenges, such as determining the appropriate time horizon and peer group comparability.
- Synthesis of why disparate methods often lead to conflicting conclusions regarding M&A success.
Excerpt from the Book
2.1 DEFINITION OF SUCCESS
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).
Summary of Chapters
1 INTRODUCTION: This chapter introduces the prevalence of M&A activity, outlines the problem of high failure ratios, and defines the paper's objective to critically analyze success measurement methods.
2 OBJECTIVES OF MERGERS AND ACQUISITIONS: This section defines "success" as goal-oriented and examines shareholder value as the primary objective, complemented by financial, HR, and market-strategic dimensions.
3 THE PERIOD OF MEASUREMENT: This chapter highlights the difficulty in selecting an appropriate timeframe for success measurement, noting that data in literature varies significantly, often recommending a three-year window.
4 THE COMPARISON OF MEASUREMENT RESULTS: This section discusses the necessity of benchmarking and the problems associated with simple before-and-after comparisons without considering peer groups or "as-if" scenarios.
5 METHODS FOR MEASURING THE SUCCESS OF AN M&A: This core chapter details objective methods (annual accounts, capital market, event-oriented) and subjective methods (questioning stakeholders) to evaluate M&A performance.
6 CONCLUSION: The final chapter summarizes that success measurement is complex, necessitates a combination of methods, and cautions against drawing general conclusions from isolated studies.
Keywords
Mergers and Acquisitions, M&A success, Shareholder Value, Capital Market, Annual Accounts, Subjective Evaluation, Synergy Effects, Event Studies, Abnormal Returns, Market Capitalization, Fluctuation Ratio, Integration Process, Stakeholders, Financial Dimension, Strategic Objectives
Frequently Asked Questions
What is the fundamental purpose of this academic work?
The paper aims to critically evaluate the various methodologies used to measure the success of Mergers and Acquisitions, addressing the inconsistencies often found in empirical studies regarding success rates.
What are the central themes discussed in the paper?
The central themes include the definition of success, the primary role of shareholder value, the practical problems of measurement periods, and the distinction between objective and subjective evaluation models.
What is the primary research goal or question?
The primary goal is to provide an overview and critical analysis of different evaluation methods to determine why they produce differing results and how M&A success can be more reliably assessed.
Which scientific methods are primarily utilized?
The authors review and synthesize existing empirical literature, including financial performance models like CAPM, Market Models, accounting-based ratio analysis, and qualitative survey-based methodologies.
What topics are covered in the main section of the paper?
The main section covers objective metrics such as annual accounts and capital market reactions (abnormal returns), as well as subjective methods like the systematic questioning of managers, employees, and experts.
Which key terms characterize the research?
Key terms include shareholder value, M&A success, abnormal returns, synergies, integration process, and various quantitative and qualitative evaluation models.
Why is the "Subjective Evaluation Method" considered important?
It is crucial for capturing the success of the integration process and internal changes (like culture and know-how transfer) which are often missed by purely financial or market-based metrics.
How do the authors view the "Capital Market Oriented" approach?
The authors categorize it as theoretically the best performance index available for investor interests, yet highlight significant flaws such as the assumption of total market information efficiency.
- Quote paper
- Charlotte Walz (Author), Carmen Hickl (Author), 2004, Controlling the Results of Mergers and Acquisitions - Methods for Measuring the M&A Success, Munich, GRIN Verlag, https://www.grin.com/document/47830
