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Why Mergers Fail

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  • Ralph M. Sonenshine
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    Abstract

    A number of empirical studies have shown that negative abnormal returns often result shortly after a once promising merger is consummated. There are few consistent explanations, however, as to why so many mergers result in such poor performance. This paper sheds light on this issue by examining the effect that structural factors (including market concentration and R&D intensity) have on post-merger abnormal returns. The paper also attempts to assess how differences in valuation among bidders, along with the presence of multiple bidders, influencethe performance of the merged firm. Our findings show that firm value is positively impacted in the first one to three years post merger by acquiring related assets, but that participating in a merger wave in these years has a negative influence. Over longer periods of time these effects are not evident and instead post-merger performance is impacted foremost by intangible asset intensity.

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    File URL: http://www.american.edu/cas/economics/pdf/upload/2011-5.pdf
    File Function: First version, 2011
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    Bibliographic Info

    Paper provided by American University, Department of Economics in its series Working Papers with number 2011-05 JEL classification:.

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    Date of creation: Jul 2011
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    Handle: RePEc:amu:wpaper:2011-05

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    Web page: http://www.american.edu/cas/economics/

    Related research

    Keywords: Mergers; Challenges; Abnormal Returns; Research and Development (R&D); Market Concentration;

    This paper has been announced in the following NEP Reports:

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    1. Gugler, Klaus & Mueller, Dennis C. & Yurtoglu, B. Burcin & Zulehner, Christine, 2003. "The effects of mergers: an international comparison," International Journal of Industrial Organization, Elsevier, vol. 21(5), pages 625-653, May.
    2. Lakonishok, Josef & Vermaelen, Theo, 1990. " Anomalous Price Behavior around Repurchase Tender Offers," Journal of Finance, American Finance Association, vol. 45(2), pages 455-77, June.
    3. Jarrell, Gregg A & Brickley, James A & Netter, Jeffry M, 1988. "The Market for Corporate Control: The Empirical Evidence Since 1980," Journal of Economic Perspectives, American Economic Association, vol. 2(1), pages 49-68, Winter.
    4. Mueller, Dennis C., 1989. "Mergers : Causes, effects and policies," International Journal of Industrial Organization, Elsevier, vol. 7(1), pages 1-10, March.
    5. Harford, Jarrad, 2005. "What drives merger waves?," Journal of Financial Economics, Elsevier, vol. 77(3), pages 529-560, September.
    6. Gort, Michael & Hogarty, Thomas F, 1970. "New Evidence on Mergers," Journal of Law and Economics, University of Chicago Press, vol. 13(1), pages 167-84, April.
    7. Matthew Rhodes-Kropf & S. Viswanathan, 2004. "Market Valuation and Merger Waves," Journal of Finance, American Finance Association, vol. 59(6), pages 2685-2718, December.
    8. Mitchell, Mark L. & Mulherin, J. Harold, 1996. "The impact of industry shocks on takeover and restructuring activity," Journal of Financial Economics, Elsevier, vol. 41(2), pages 193-229, June.
    9. Shleifer, Andrei & Vishny, Robert W., 1989. "Management entrenchment : The case of manager-specific investments," Journal of Financial Economics, Elsevier, vol. 25(1), pages 123-139, November.
    10. Agrawal, Anup & Jaffe, Jeffrey F & Mandelker, Gershon N, 1992. " The Post-merger Performance of Acquiring Firms: A Re-examination of an Anomaly," Journal of Finance, American Finance Association, vol. 47(4), pages 1605-21, September.
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