Methodologies Used to Determine Mergers and Acquisitions' Performance

Article excerpt

ABSTRACT

Over the years, several studies have been done by researchers and practitioners to understand the significance of adopting Mergers & Acquisitions (M&A) strategy by organizations. The motivation has been to understand whether the perceived benefits from this strategy have accrued or not. They have studied whether these acquisitions are value enhancing or destructive strategies for acquiring organizations.

We investigate this question from the perspective of methods used to determine post acquisition value. We research M&A literature over the last three decades to describe different methods used to measure acquisition performance; identify the most popular methods; their limitations and benefits; and analyze whether research conclusions differ depending upon the method used to measure performance. We also research whether methods used in emerging markets such as India differ from those typically used in the developed markets.

We find that internationally event studies dominate acquisition performance research; while research on Indian acquisitions has primarily been based on accounting returns. There are a few other methods such as data envelopment analysis and balanced score card methods which warrant further research and inclusion in M&A literature. We also find that research conclusions differ depending on the method selected for performance evaluation; which is an important factor for researchers and practitioners to consider while drawing conclusions on acquisition success or failure.

We recommend that the method of evaluation should be based on the country of study, and more significantly the aspect under examination i.e. profitability, stock market perception or efficiency. Our contribution to the present body of knowledge is to suggest that methods of evaluation used in developed markets may not work in emerging markets and that method selection can influence research conclusions.

Keywords: Mergers and Acquisitions, Performance, Value

JEL classification numbers: G34, L25

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

"There is a need for additional theory development and changes to M&A research methods, most post-acquisition performance research has only employed stock market event studies, thus ignoring M&A effects on other potentially relevant dimensions of firm performance" (King, Daily and Covin. 2004).

Over the years, several studies have been done by researchers and practitioners to understand the significance of adopting M&A strategy for organizations. The motivation has been to understand whether the perceived benefits from this strategy have accrued or not. They have studied whether these acquisitions are value enhancing or destructive strategies for the acquiring organization. The methods used to measure this parameter have been varied. We have reviewed the literature to identify the methodologies used to measure post acquisition performance and the benefits and limitations of these methodologies. The objective of doing this review is to analyze the methodologies and identify the research gaps for further research in the area.

Our contribution is to bring together the various methods of measuring acquisition performance over the last three decades, including an analysis of recent studies during the 2005 to 2010 time frame. We describe the benefits and shortcomings of different methods, which would be useful to researchers in understanding how their conclusions on performance may be impacted by the method selected for measurement. We also research whether methods used in emerging markets such as India are the same as those typically used in the developed markets.

As M&A literature is inter-disciplinary in nature, we have selected research papers from several domains of management though emphasizing more on finance and strategy. Search terms used were 'Mergers' and 'Acquisition' and 'Performance', with the primary focus on journals such as Strategic management Journal, Journal of Finance, Journal of Financial Economics, Journal of Financial and Quantitative Analysis, Journal of Management, Academy of Management. …