merger for a sample of transactions in the United Kingdom between 1964 and 1971. This study draws upon a relatively large sample (233 observations), and tests the change in profitability following the merger. Meeks looks at the change in return on assets8 (ROA) compared to the change in ROA for the buyer’s industry. His chief finding is excerpted in Exhibit 3.9. Meeks’ findings reveal a decline in ROA for acquirers following the transaction, with performance reaching the nadir five years after. For nearly two-thirds of acquirers, performance is below the standard of the industry. He concludes that the mergers in his sample suffered a “mild decline in profitability” (page 25).
Mueller (1980) edited a collection of studies of M&A profitability across seven nations (Belgium, Germany, France, Netherlands, Sweden, United Kingdom, and United States). All the studies applied standard tests and data criteria and therefore afford an unusually rich cross-border comparison of results across parts of Europe and the United States. The research tested theories about changes in size, risk, leverage, and profitability. Profitability was measured three ways: (1) profit divided by equity; (2) profit divided by assets, and (3) profit divided by sales. The changes in profitability for an acquirer (measured as the difference between the postacquisition performance and the average profitability for five years before the transaction) were compared to similar measures for two benchmark groups: firms matched on the basis of size and industry and who made no acquisitions, and a general sample of firms that neither made acquisitions nor were acquired during the observation period. Consistent with Meeks’ finding, Mueller’s work finds that acquirers are significantly larger than targets, acquirers have been growing faster than their peers and than their targets, and are more highly leveraged than targets and peers. Regarding profitability, acquirers show no significant differences—the specific data for the United States are generally representative of the findings across many nations. Exhibit 3.10 on page 53 gives an excerpt of these findings.
EXHIBIT 3.7 Summary of Shareholder Return Studies for M&A: Combined Returns to Shareholders of Acquiring Firm and Target Firm
| Study | Cumulative Abnormal Returns | Sample Size | Sample Period | Event Window (Days) | % Positive Returns | Notes |
|---|---|---|---|---|---|---|
| Halpern (1973) | +$27.35 MM | 77 | 1950–1965 | (–140,0) | N/A | Mergers. |
| Langetieg (1978) | 0% | 149 | 1929–1969 | (0,60) | 46% | Mergers; uses effective date as event baseline. |
| Firth (1980) | –£36.6 MM | 434 | 1969–1975 | (–20,0) | N/A | U.K. acquisitions. |
| Bradley, Desai, Kim (1982) | +$17 MM | 162 | 1962–1980 | (–20,5) | N/A | Tender offers; referenced through Jensen, Ruback (1983). |
| Bradley, Desai, Kim (1983) | +$33.9 MM | 161 | 1963–1980 | (–20,5) | N/A | Referenced through Weidenbaum, Vogt (1987). |
| Malatesta (1983) | +$32.4 MM* | 30 | 1969–1974 | (–20,20) | N/A | Mergers. |
| Varaiya (1985) | +$60.7 MM | N/A | N/A | (–60,60) | N/A | Referenced through Weidenbaum, Vogt (1987). |
| Bradley, Desai, Kim (1988) | +$117 MM (7.43%)* | 236 | 1963–1984 | (–5,5) | 75% | Tender offers only; subperiod data available for 7/63–6/68, 7/68–12/80, 1/81–12/84; combined returns have not changed significantly over time. |
| Lang, Stulz, Walkling (1989) | +11.3%* | 87 | 1968–1986 | (–5,5) | N/A | Tender offers only. |
| Franks, Harris, Titman (1991) | +3.9%* | 399 | 1975–1984 | (–5,5) | N/A | Mergers and tender offers. |
| Servaes (1991) | +3.66%* | 384 | 1972–1987 | (–1,close) | N/A | Mergers and tender offers. |
| Bannerjee, Owers (1992) | +$9.95MM | 33 | 1978–1987 | (–1,0) | N/A | White knight bids. |
| Healy, Palepu, Ruback (1992) | +9.1%* | 50 | 1979–1984 | (–5,5) | N/A | Largest U.S. mergers during period. |
| Kaplan, Weisbach (1992) | +3.74%* | 209 |
|