In times of globalization and new emerging markets, companies face escalated pressure to continually adapt to changing environments and to develop appropriate strategy adjustments to stay competitive. To improve performance by expansion, companies engage in mergers and acquisitions (M&A). Volumes (number of deals) and values (price of deals) of M&A have quintupled to a value of almost 4 trillion U.S. dollars (2018) in the last 30 years. This development reflects the growing strategic relevance of those transactions for managers.
Even though M&A are among the most powerful tools for managers to create shareholder value and can substantially upgrade a company's performance, they are also one of the most failure-intensive activities due to global economic uncertainty, the possibility of cultural clashes and managerial self-interest. Consequently, it is essential for shareholders as well as for managers to understand the critical drivers for a successful M&A deal.
In existing research, there is sufficient evidence that M&A benefit the target firms economically whereas the performance impact for acquirers is ambiguous. Moreover, most studies examine M&A activities in the United States or the United Kingdom while Germany is widely neglected despite its global economic relevance.
This study aims to fill this research gap. No previous study explores the effect of DAX 30 M&A activities; nor does any study assess the same combination of influencing factors for a deal's success. Resultingly, this paper contributes to the existing literature by identifying drivers for acquirers' short-term M&A success. Focusing on German companies, it clarifies which factors shareholders use to evaluate M&A transactions. Thereby, it helps managers to determine which deals are more promising than others.
Table of Content
Motivation
1. Introduction
2. Theoretical Foundations
2.1 Drivers, Importance and Risk Factors of M&A
2.2 Relevance of the German Economy in the Global Context
2.3 Influencing Factors on M&A Success
2.3.1 Geographic Scope: Cross-Border vs. Domestic M&A
2.3.2 Industry Relatedness: Cross-Industry vs. Intra-Industry M&A
2.3.3 Other Drivers of M&A Success and Risk
3. Methodology of the M&A Study
3.1 Event Study Approach
3.1.1 Time Series Analysis for the Expected Return Estimation
3.1.2 Calculation of the Cumulative Abnormal Return
3.2 Regression Analysis
4. Data and Sample Selection
5. Results and Analysis
5.1 Results of the Cumulative Abnormal Return Calculation
5.2 Regression 1 – Full Regression Model
5.2.1 Underperformance of Cross-Border Deals
5.2.2 Underperformance of the Banking Industry
5.2.3 Underperformance of Non-Tech Acquirers
5.3 Regressions 2.1 and 2.2 – Separation of Cross-Border and Domestic Deals
5.3.1 Underperformance of Cross-Border Deals within the EEA
5.3.2 Overperformance of Domestic Conglomerates and Tech-Acquirers
5.4 Regressions 3.1 and 3.2 – Separation of Cross-Industry and Intra-Industry Deals
5.5 Regression 4 – Industry Comparison
5.6 Regression 5 – Banking Industry
6. Implications and Limitations of the Study
7. Conclusion
Objectives & Research Topics
The primary objective of this research is to evaluate the wealth effect of merger and acquisition (M&A) activities on German DAX 30 companies and to identify the critical drivers of short-term success, specifically focusing on the roles of geographic scope and industry relatedness in shaping shareholder perceptions and abnormal returns.
- Empirical analysis of 274 M&A transactions involving German DAX 30 firms between 2002 and 2019.
- Application of an event study approach to calculate Cumulative Abnormal Returns (CAR) around the announcement date.
- Investigation into how cross-border versus domestic deals influence acquirer performance.
- Assessment of the impact of industry relatedness (intra-industry vs. cross-industry/conglomerate deals) on shareholder value.
- Evaluation of industry-specific performance, with a dedicated focus on the banking and high-tech sectors.
Excerpt from the Book
2.3.1 Geographic Scope: Cross-Border vs. Domestic M&A
Cross-border M&A activities have grown exponentially in the last decades and now account for most of all Foreign Direct Investments (FDI) (Mateev & Andonov, 2016, p. 329). Cross-border M&A involve an acquiring and a target firm headquartered in different countries (Hitt et al., 2004, p. 307). Due to the high physical and cultural difference, they usually induce added costs and higher complexity. So why should a company engage in cross-border M&A when it is uncertain, whether the respective wealth effect is higher than the one of domestic transactions?
As the world becomes more globalized and product and capital market more integrated, entry barriers into foreign countries diminish significantly. Liberalization of financial policies and regional agreements simplify investments in foreign countries. Resultingly, companies can benefit from investment opportunities at home and abroad (Di Giovanni, 2005, p. 128). Thus, firms are confronted with the essential question of whether to engage in domestic or cross-border transactions (Moeller & Schlingemann, 2005, p. 534).
In order to stay competitive in this global business environment, companies strategically engage in cross-border M&A activities (Mateev & Andonov, 2016, p. 329f.). Multinational Enterprises (MNEs) do not only create shareholder value from a higher geographic scope but also by leveraging synergies of their intangible assets such as human capital and, resultingly, enhance efficiency (Doukas & Travlos, 1988, p. 1162f.). Cultural differences between acquirers and targets including different routines and experiences can positively affect cross-border acquisitions´ performance. More precisely, as learning from foreign cultures enables MNEs to flexibly adapt to economic uncertainties, it can create value for the acquirer (Morosini et al., 1998, p. 139; Shimizu et al., 2004, p. 309f.).
Summary of Chapters
1. Introduction: Presents the research motivation, background of M&A in corporate finance, and the research gap concerning DAX 30 firms.
2. Theoretical Foundations: Reviews existing literature on M&A drivers, risks, and the impact of geographic and industry-related factors on success.
3. Methodology of the M&A Study: Details the two-step event study and regression approach used to estimate abnormal returns and analyze influencing factors.
4. Data and Sample Selection: Describes the selection criteria for the 274 M&A deals involving DAX 30 companies between 2002 and 2019.
5. Results and Analysis: Discusses findings from the regression models, highlighting performance differences across cross-border/domestic deals, industries, and technological focus.
6. Implications and Limitations of the Study: Offers strategic advice for managers and reflects on the limitations of the event study approach regarding market anticipation.
7. Conclusion: Summarizes the study’s findings, confirming the value destruction on average and identifying specific sectoral and geographic performance drivers.
Keywords
Mergers and Acquisitions, M&A, Event Study, Cumulative Abnormal Return, CAR, DAX 30, Geographic Scope, Industry Relatedness, Cross-Border M&A, Conglomerates, Shareholder Value, Banking Industry, High-Tech, Synergies, Wealth Effect
Frequently Asked Questions
What is the core focus of this research paper?
The paper evaluates the short-term success of mergers and acquisitions (M&A) performed by German DAX 30 companies by analyzing shareholder reactions measured through Cumulative Abnormal Returns (CAR).
Which key variables does the study analyze regarding M&A success?
The study primarily investigates the effects of geographic scope (cross-border vs. domestic deals) and industry relatedness (intra-industry vs. cross-industry/conglomerates) on acquirer performance.
What is the primary objective of the research?
The main objective is to fill a research gap regarding DAX 30 companies and to provide evidence on whether these M&A activities create or destroy value for shareholders in the short term.
What scientific method is employed in this study?
The author uses a two-step approach: an event study method to calculate the Cumulative Abnormal Return (CAR) and a subsequent regression analysis to identify significant influencing factors.
What does the main body of the work cover?
The main body reviews the theoretical foundations of M&A, details the dataset and sample selection criteria, and presents the results of five distinct regression models, including sub-regressions based on transaction value.
What are the characterizing keywords of this study?
Key terms include Mergers and Acquisitions, M&A, Event Study, Cumulative Abnormal Return, DAX 30, Geographic Scope, Industry Relatedness, and Shareholder Value.
Why do banks show significant underperformance in this study?
The results suggest that banking sector consolidations often fail to improve economic performance, and many deals were initiated by regulators during the financial crisis to avoid bankruptcy, leading to value destruction.
How do cross-border deals perform compared to domestic deals?
The study finds that cross-border deals often underperform compared to domestic ones, particularly when conducted within the European Economic Area (EEA), due to intense market competition and potential overpricing.
Do conglomerates (cross-industry deals) destroy shareholder value?
Contrary to much academic literature, the study finds that conglomerates often perform better than intra-industry deals, particularly for domestic transactions, potentially due to portfolio diversification benefits.
- Citar trabajo
- Carolin Schmitt (Autor), 2019, Determinants of Success of M&A Transactions, Múnich, GRIN Verlag, https://www.grin.com/document/540293