There are several studies that showed that on average 50% of all M&A deals lead to a failure. There are some explanations for the high rate of failures in empirical research, e.g. hubris which is the overconfidence of the management as first mentioned by Roll or managerialism. Still M&A transactions take place frequently and shareholders do not prohibit them. Cartwright & Schoenberg suggest that this unchanged acceptance of shareholders for M&A activities exists because there are some synergies or gains, but the measures used in research do not acknowledge them properly. They state that in a market environment such inefficiencies (value destroying M&A transaction) are hard to believe.
I want to contribute to this debate by identifying, describing and finally analyzing several measures that are used in research and apply them on the same sample. According to Thanos & Papadakis the used measure in a study seems to highly influence the outcome. They found that return on assets (ROA) measures often lead to a negative outcome while cash flow measures often lead to a positive outcome. They state that the usage of several measures in the same study could lead to more robust results. There are a lot of different measures used to analyze M&A performance. Meglio & Risberg divide these measures into a financial domain including measures for market performance and measures for accounting performance and a non-financial domain including measures for operational performance and measures for overall performance. In my empirical analysis I will focus on accounting and market measures due to data availability. The accounting measures can be separated into three major categories: ratios, growth measures and operating cash flows.
I will start with a literature review to examine what measures are used to measure M&A Deal performance in research. Therefore, I categorize the accounting measures according to the framework of Thanos & Papadakis like described above and add the market measure abnormal returns to my analysis. Following my literature review I will discuss the pros and cons of the different measures and which measures seem eligible in which situation. After that I will analyze European M&A transactions using data from the Thomson Eikon Databank. Most research focuses on US M&A deals which results in an underrepresentation of research for European transactions. By analyzing the latter, I address this problem.
Table of Contents
1. Introduction
2. Literature Review
2.1 Accounting Measures
2.1.1 Ratios
2.1.2 Growth measures
2.1.3 Operating Cash Flows
2.2 Abnormal Returns
2.3 Other Measures
2.4 Measure Comparison
3. Empirical Analysis: European M&A Transactions
3.1 Research Design
3.1.1 Sample
3.1.2 Model
3.1.3 Variables
3.2 Results
4. Discussion
5. Conclusion
Research Objectives and Key Topics
The primary objective of this thesis is to contribute to the debate on post-merger performance measurement by systematically identifying, describing, and empirically applying various performance metrics to a consistent dataset of European M&A transactions. The research investigates how different choices of performance indicators—specifically accounting versus market-based measures—influence the assessed success or failure of M&A deals.
- The influence of performance measure selection on M&A outcomes
- Classification and critical review of accounting and market-based metrics
- Empirical analysis of 649 European M&A transactions using cross-sectional regression
- Evaluation of post-deal success rates across diverse quantitative indicators
- Comparison of accounting distortions and market-adjusted returns
Excerpt from the Book
2.1.1 Ratios
One type of measures frequently used to measure the post deal performance of M&A transactions are ratios. In their literature review of accounting based measures used in studies that were published in leading journals Thanos & Papadakis (2012, pp. 112-113) found that the usage of them increased rapidly in the last decades. They furthermore found that most researchers are focusing their level of analysis on acquiring firms since financial data for target firms is often not available. The period analyzed in these studies ranged from some months to ten years and wasn’t stated at all in one fourth of the studies. They found five ratios used in these studies: Return on assets (ROA), return on sales (ROS), return on investment (ROI), return on equity (ROE) and return on capital employed (ROCE). Meeks & Meeks (1981, pp. 335-340) give a comprehensive overview about the ratios used to measure post deal performance. According to the literature review of Thanos & Papadakis (2012, p. 112) ratios are used to indicate post-deal performance by comparing the pre-deal ratio of the acquirer with the post-deal ratio of the acquirer or by comparing the pre-deal ratio of the pro-forma combined firm with the post-deal ratio of the combined firm using a weighted average. The ratio that is used by far the most is ROA and it is measuring a firms profitability (Thanos & Papadakis, 2012, pp. 112-114). ROA equals income before interest and taxes divided by total assets (Stanton, 1987, p. 294). Papadakis & Thanos (2010, p. 866) calculated the change in return on assets induced by M&As as follows:
Summary of Chapters
1. Introduction: This chapter establishes the high failure rate of M&A deals found in existing literature and introduces the research objective to analyze multiple performance measures to address existing outcome disparities.
2. Literature Review: Provides a theoretical foundation by categorizing performance metrics into accounting measures (ratios, growth, cash flows) and market measures (abnormal returns), while discussing their respective pros, cons, and biases.
3. Empirical Analysis: European M&A Transactions: Details the research methodology, sample selection of 649 European transactions, and the application of cross-sectional regression models to evaluate the effect of acquisitions on firm performance.
4. Discussion: Interprets the empirical results, highlighting how the selection of performance indicators significantly alters conclusions about M&A success and noting the lack of correlation between different metrics.
5. Conclusion: Summarizes the thesis findings, confirming a typical 50% success rate for M&A transactions while pointing out the inherent limitations of standard market and accounting benchmarks.
Keywords
Mergers and Acquisitions, Post-deal Performance, Return on Assets, Operating Cash Flow Returns, Abnormal Returns, European M&A, Performance Measurement, Empirical Analysis, Corporate Finance, Synergy, Accounting Ratios, Growth Measures, Market-adjusted Returns, Deal Success, Financial Analysis
Frequently Asked Questions
What is the core focus of this academic paper?
The paper focuses on evaluating the post-merger performance of European M&A transactions by comparing various quantitative performance measures, as the author argues that the choice of metric significantly influences whether a deal is perceived as successful or failed.
What are the primary thematic areas covered?
The research covers accounting-based performance indicators (ratios, growth measures, and operating cash flows) and market-based indicators, specifically abnormal returns, using a comparative analytical framework.
What is the central research question?
The primary objective is to investigate how different performance measures affect the reported outcome of M&A deals and to determine if these measures provide consistent results regarding transaction success.
Which scientific methodology is employed?
The author uses a quantitative methodology involving cross-sectional regression analysis to assess the impact of M&A transactions on firm performance, using pre- and post-merger data adjusted for market movements.
What does the main part of the thesis address?
The main body systematically categorizes existing literature on M&A performance measures, derives mathematical models for these metrics, and presents an empirical study based on 649 European acquisitions using Thomson Eikon data.
Which keywords best characterize this work?
Key terms include Mergers and Acquisitions, Post-deal Performance, Market-adjusted Returns, Accounting Ratios, and Empirical Analysis.
Why are accounting-based measures like ROA often criticized in this thesis?
The thesis notes that accounting measures like ROA can be distorted by the recognition of goodwill during the purchase method of accounting, which inflates assets and potentially obscures the true performance impact of the merger.
What is the author's conclusion regarding the success rate of M&A deals?
The author concludes that approximately 50% of M&A transactions result in failure, a finding that remains consistent across various performance measures despite the high ambiguity and inconsistency in how the market predicts post-deal performance.
- Quote paper
- Tim Ulbricht (Author), 2018, The Measurement of Post Deal Performance. An Empirical Analysis of European M&A Transactions, Munich, GRIN Verlag, https://www.grin.com/document/584714
