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The Long-Term Operating Performance of European Mergers and Acquisitions

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  • Martynova, M.
  • Oosting, S.
  • Renneboog, L.D.R.

    (Tilburg University, Tilburg Law and Economics Center)

Abstract

We investigate the long-term profitability of corporate takeovers of which both the acquiring and target companies are from Continental Europe or the UK.We employ four different measures of operating performance that allow us to overcome a number of measurement limitations of the previous literature, which yielded inconsistent conclusions.Both acquiring and target companies significantly outperform the median peers in their industry prior to the takeovers, but the raw profitability of the combined firm decreases significantly following the takeover.However, this decrease becomes insignificant after we control for the performance of the peer companies which are chosen in order to control for industry, size and pre-event performance.None of the takeover characteristics (such as means of payment, geographical scope, and industry-relatedness) explain the post-acquisition operating performance. Still, we find an economically significant difference in the long-term performance of hostile versus friendly takeovers, and of tender offers versus negotiated deals: the performance deteriorates following hostile bids and tender offers.The acquirer's leverage prior takeover seems to have no impact on the post-merger performance of the combined firm, whereas the acquirer's cash holdings are negatively related to performance.This suggests that companies with excessive cash holdings suffer from free cash flow problems and are more likely to make poor acquisitions.Acquisitions of relatively large targets result in better profitability of the combined firm subsequent to the takeover, whereas acquisitions of a small target lead to a profitability decline.

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Bibliographic Info

Paper provided by Tilburg University, Tilburg Law and Economic Center in its series Discussion Paper with number 2006-030.

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Date of creation: 2006
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Handle: RePEc:dgr:kubtil:2006030

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Web page: https://www.tilburguniversity.edu/research/institutes-and-research-groups/center-ar/

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References

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  1. Marc Goergen & Luc Renneboog, 2004. "Shareholder Wealth Effects of European Domestic and Cross-border Takeover Bids," European Financial Management, European Financial Management Association, vol. 10(1), pages 9-45.
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  3. Jun-Koo Kang & Anil Shivdasani & Takeshi Yamada, 2000. "The Effect of Bank Relations on Investment Decisions: An Investigation of Japanese Takeover Bids," Journal of Finance, American Finance Association, vol. 55(5), pages 2197-2218, October.
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  21. Linn, Scott C. & Switzer, Jeannette A., 2001. "Are cash acquisitions associated with better postcombination operating performance than stock acquisitions?," Journal of Banking & Finance, Elsevier, vol. 25(6), pages 1113-1138, June.
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Citations

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Cited by:
  1. Svetlana Grigorieva & Tatiana Petrunina, 2013. "The performance of mergers and acquisitions in emerging capital markets: new evidence," HSE Working papers WP BRP 20/FE/2013, National Research University Higher School of Economics.
  2. Shantanu Dutta & Vinod Kumar, 2009. "Mergers and Acquisitions (M&AS) by R&D Intensive Firms," Journal of Risk and Financial Management, MDPI, Open Access Journal, vol. 2(1), pages 1-37, December.
  3. INOUE Kotaro & NARA Saori & YAMASAKI Takashi, 2013. "Are Japanese Acquisitions Efficient Investments?," Discussion papers 13085, Research Institute of Economy, Trade and Industry (RIETI).

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