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Long-term impact of merger synergies on performance and value

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  • Alhenawi, Yasser
  • Krishnaswami, Sudha

Abstract

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.

Suggested Citation

  • Alhenawi, Yasser & Krishnaswami, Sudha, 2015. "Long-term impact of merger synergies on performance and value," The Quarterly Review of Economics and Finance, Elsevier, vol. 58(C), pages 93-118.
  • Handle: RePEc:eee:quaeco:v:58:y:2015:i:c:p:93-118
    DOI: 10.1016/j.qref.2015.01.006
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    3. Andrejs Čirjevskis, 2020. "Valuing Reciprocal Synergies in Merger and Acquisition Deals Using the Real Option Analysis," Administrative Sciences, MDPI, vol. 10(2), pages 1-25, April.
    4. Zhaozhao He & Han Yu & Lijing Du, 2020. "Cohabitation before marriage: do prior alliances enhance post-merger performance?," Review of Quantitative Finance and Accounting, Springer, vol. 54(4), pages 1315-1349, May.
    5. Bade, Marco, 2017. "The effects of mergers and acquisitions on the information production of financial markets," The Quarterly Review of Economics and Finance, Elsevier, vol. 65(C), pages 240-248.
    6. Hassan, M. Kabir & Alhenawi, Yasser, 2022. "Can information asymmetry explain both the post-merger value and the announcement discount in M&As?," International Review of Economics & Finance, Elsevier, vol. 77(C), pages 222-243.
    7. Wang, Shuxun & Wu, Kai & Lai, Seiwai, 2022. "Acquisition for innovations? M&A intensity and intra-firm innovation reallocations," Research in International Business and Finance, Elsevier, vol. 62(C).
    8. Yasser Alhenawi & Martha L. Stilwell, 2019. "Toward a complete definition of relatedness in merger and acquisition transactions," Review of Quantitative Finance and Accounting, Springer, vol. 53(2), pages 351-396, August.
    9. Tang, Haodan & Fang, Senhui & Jiang, Dianchun, 2022. "The market value effect of digital mergers and acquisitions: Evidence from China," Economic Modelling, Elsevier, vol. 116(C).

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    More about this item

    Keywords

    Mergers; Acquisitions; Related mergers; Unrelated mergers; Synergies; Diversification;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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