The Long-Term Operating Performance of European Mergers and Acquisitions

Marina Martynova
Cornerstone Research; Tilburg University – Department of Finance

Sjoerd Oosting
Tilburg University

Luc Renneboog
Tilburg University – Department of Finance; European Corporate Governance Institute (ECGI); Tilburg Law and Economics Center (TILEC)

November 2006

ECGI – Finance Working Paper No. 137/2006
TILEC Discussion Paper No. 2006-030

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.

The Long-Term Operating Performance of European Mergers and Acquisitions

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