Long-term impact of merger synergies on performance and value

We track a sample of mergers completed between 1998 and 2007 in a five year window after the merger, to study whether and to what extent synergies affect Tobin's Q and excess value in the post-merger period. We employ a Heckman two-stage self-selection model and a two-stage non-linear-instrumental variable model to account for potential endogneities in the merger decision across related and unrelated mergers. We document that excess value is positive for related mergers while it is negative for unrelated mergers in each of the five years following the merger, while Q is significantly greater than one for both types of mergers. Q and excess value decrease in the first year following the merger, but then improve systematically each year in the four years after, but with a greater increase in unrelated compared to related mergers. Controlling for self-selection and endogeneity biases, our evidence indicates that merger synergies materialize over time, but differently in unrelated and related mergers. Annual changes in market power, economies of scale and scope, and internal capital market activity contribute to changes in Q and excess value only in unrelated mergers. We conclude that the lack of synergies from market power enhancements and capital market activity in related mergers is consistent with related mergers being motivated by a need for facilitating technology and innovation transfers rather than generating synergies.