Determinants of the Strengths and Weaknesses of Acquiring Firms in Mergers and Acquisitions: A Stakeholder Perspective

Article excerpt

The success or failure of mergers and acquisitions has been shown to depend a lot on the peculiar strengths (and weaknesses) of the firms which initiate the merger or take-over, the acquirer. The present study examines the determinants of these aspects or features of acquirers through a study of 219 completed mergers and acquisitions involving publicly- held United States companies over a six-year period (1995-1998) with data provided by Mergerstat. The aim is to determine if stakeholder attributes of business combinations contribute to an independent measure of firm strengths and concerns. The data was analyzed by means of KLD STATS, a statistical tool that analyzes trends in social and environmental performance. Using a cumulative measure of KLD's assessment of corporate strengths and weaknesses, measures of a number of potential determinants (independent factors) were regressed respectively onto measures of strengths and weaknesses of the acquiring firms. The results suggest that stakeholder measures in merger and acquisition transactions do impact the assessment of corporate strengths and weaknesses.

Introduction

The primary purpose of this study is to examine whether stakeholder attributes in the merger and acquisition decision contribute to the determination of corporate strengths and concerns compiled by KLD Statistics. This study uses a stakeholder perspective by measuring a stakeholders' interest in merger and acquisition transactions and how that measure influences the assessment of the acquiring firm strengths and concerns.

The identification of stakeholders in the business combination1 decision is the challenging task, as it requires ïnclusïveness. A further complexity is the measurement of the stakeholders' interest in the transaction. The measurement difficulty is alleviated through an analysis of the merger and acquisition decision and outcome phases. As an example, target shareholders are interested in bid premiums paid in exchange for tendering their shares; an acquiring CEO interest rests with the compensation for taking on risk to initiate the transaction through integration years later. Acquiring firm shareholders are interested in post-acquisition returns on their ownership stakes. Employees of target firms have concerns for their risk of job loss during the integration phase. Consumers look for better pricing that come from synergies of combining firms.

In a sample of 2 1 9 business combinations the results show that as target shareholders are rewarded with a higher bid premium, the greater concerns for acquiring firms. However, as returns to acquiring shareholders increase, corporate strengths and concerns are both decreasing. CEO compensation is viewed negatively and does not improve strengths of acquiring firms. Institutional investors demonstrate their monitoring role through significantly decreasing strengths and increasing concerns for acquiring firms. Higher markets to book ratios reduce concerns and increase strengths for the acquiring firm, suggesting that higher market values of the combining firms contribute favorably for the acquirer.

Employee issues in mergers and acquisitions also contribute to corporate strengths and concerns. Specifically, employee layoffs following a business combination provide opportunities for the merging firms to achieve cost synergies. When there are no layoffs, concerns for the acquirer increase and no layoffs significantly reduce strengths.

This paper is organized as follows: Section 2 presents the background and literature review. Section 3 presents the research design, including the regression model, and sample selection process. Results are discussed in Section 4. Discussion and conclusions are presented in Section 5.

Background and Literature Review

The evaluation of the merger/acquisition outcome depends on its ability to produce the most for the most. To do so requires analysis of costs and benefits to stakeholders (Chase, 1 997). …