To merge or not to merge? The impact of mergers and acquisitions on corporate success in the pharmaceutical industry

Two of the chief goals of most companies are to secure their own existence and generate above‐average returns for their owners. One of the main ways that companies attempt to achieve these goals is to grow, and pharmaceutical companies are no exception in this regard. However, whereas internal growth tends to be organic and slow, external growth can usually be achieved more quickly, for example, through mergers, acquisitions or other external transactions. The aim of this study is to evaluate the impact of merger and acquisition (M&A) activities on pharmaceutical company success, measured in terms of financial and other performance indicators. We identified the top 30 pharmaceutical companies worldwide by revenue in 2020 and gathered data on M&A activities and a broad range of financial and other performance indicators from 2000 to 2020. We then used a generalised difference‐in‐difference design to evaluate the extent to which a company's success was affected by substantial M&A activities versus organic growth. To do so, we defined a premerger period of 2 years and a postmerger period of 3 years. We classified M&A activities as substantial when transaction costs were greater than 20% of a company's annual revenue. Our results indicate that there is a clear trend for M&As to have a positive impact on corporate success compared with organic growth. For example, after an M&A, a company's annual revenue increased on average by 3.50 billion United States dollars (USD) (p = 0.000) in the first year and by 4.52 billion USD (p = 0.000) in the second year. For employee growth, we found significant increases across all time periods (p = 0.000). Postmerger increases were also seen in gross profit in the first (+1.65 billion USD, p = 0.053) and second (+2.61 billion USD, p = 0.005) years, as well as in net profit (+6.82 billion USD, p = 0.014) and return on assets in the first year (+12.04 percentage points, p = 0.016). However, indicators of innovation (e.g. research and development [R&D] spending) and of stakeholder value (e.g. market capitalisation) did not show a significant increase. Compared with the impact of organic growth alone, M&A activities in the pharmaceutical industry led to significantly higher market dominance, size and profits but did not have a significant impact on innovation or shareholder value over the short time.