Performance of Mergers and Acquisitions in the Pharmaceutical Industry: A Comparative Perspective

By Demirbag, Mehmet; Ng, Chang-Keong et al. | Multinational Business Review, Summer 2007 | Go to article overview

Performance of Mergers and Acquisitions in the Pharmaceutical Industry: A Comparative Perspective


Demirbag, Mehmet, Ng, Chang-Keong, Tatoglu, Ekrem, Multinational Business Review


Abstract:

This study provides new evidence on the nature of value creation in M&A activity based on a sample of giant pharmaceutical M&As and independent non-M&A rival firms. Relying on multiple indicators of performance, their post-M&A performance was compared with their pre-M&A performance as well as with the performance of other major pharmaceutical firms that have not been involved in M&A activity. Based on three measures of operating M&A performance, it has been noted in general that no value creation was realized in the sample M&As in terms of research productivity, return on investment, and profit margin. The sample M&As had lower research productivity than that of both pre-M&A and independent non-M&A rival firms. In a similar vein, with regard to return on investment, M&As were not better than their pre-M&A firms, but performed relatively better than their non-M&A rivals. As far as the profit margin is concerned, the sample M&As, however, appeared to have better performance than pre-M&A firms and almost on par with the non-M&A rivals.

INTRODUCTION

The pharmaceutical industry has been undergoing a profound restructuring since the mid-1990s. This restructuring has been driven by substantial changes in regulatory, financial, and economic forces surrounding the industry. Some of these forces include licensing, insurance, royalties, shareholder return, patent and generic competition, extremely high risk and cost of research and development (R&D), clinical trial issues, international regulation, and marketing distributions. Based on empirical findings it has been noted that the pharmaceutical industry has been increasingly concentrated over the past decade and that the ten largest pharmaceutical firms accounted for nearly 48 percent of worldwide sales in 2003 (The Association of the British Pharmaceutical Industry, 2004). Much of this consolidation stems from the recent surge in mergers and acquisition (M&A) activity. Despite the frenzy of M&A activity in the pharmaceutical industry, it is interesting to note that the industry as a whole remains fragmented, with the largest competitor comprising only a 10 percent share of the global market (The Association of the British Pharmaceutical Industry 2004).

The total value of M&A deals completed between 1998 and 2000 alone exceeded the total value of M&A deals completed in the period before 1998 (Henry 2002). Commensurate with this surge in M&A activity, research on M&As has been increasing from both academia and business circles. Previous studies in M&A strategy (e.g., Singh and Montgomery 1987, Seth 1990, Hitt et al. 1991, Healy et al. 1992, Ahuja and Katila 2001, Andrade et al. 2001, Koenig and Mezick 2003, Shimizu et al. 2004) focus on the motivation for M&A, and assessment of pre-M&A and post-M&A performance, from a comparative perspective of both target and acquiring firms, whether M&As add, destroy, or solely redistribute value. While these studies suggest that merging firms capture synergies and create values through M&A practices, their contribution to firm performance still remains a controversial issue. Even if a M&A truly creates value, it is essential to identify to what extent value creation criteria have been met by the newly merged organization from the operating performance perspective as far as the pharmaceutical industry is concerned. In fact, the new organization established through the M&A process leads to several complexities in terms of dealing with diverse corporate cultures, product portfolios, R&D projects, facilities, territories, and technologies. For instance, The Economist (1999) reported that only 17 percent of cross-border M&As created shareholder value while 53 percent destroyed it.

Given the increasing number of cross-border M&As, along with their economic and social importance, a better understanding of post M&A performance is definitely called for. …

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