The effect of Horizontal Mergers and Acquisitions (M&As) on cost synergies

(1)

The effect of Horizontal Mergers and Acquisitions (M&As)

on cost synergies

Author: Sidrak Mekonen

UVA Id: 10993355

Supervisor: Timo Klein

Bachelor Thesis Economics and Finance

University of Amsterdam

Faculty of Economics & Business

(2)

Statement of Originality

This document is written by Sidrak Mekonen, who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

Abstract

This thesis explores the effect that horizontal Mergers and Acquisitions have on cost synergy in four major service industries in North America. The sample data contains 243 mergers and acquisitions from 2008 until 2015. These deals were chosen based on their similarity in terms of financial status between the merging firms and non-merging participants in the industries. From these deals 78 belong to the insurance industry, 96 to telecommunication, 50 to transportation and the remaining 19 to hotel and restaurants. The results show significant negative effects of merger and acquisition on a firm’s total cost. This decrease in total cost ultimately leads to positive cost synergy. However, in all the deals addressed none of the firms manage to meet their cost synergy estimations. The maximum realized synergy among the chosen industries is by the transportation industry where firms attained 86-95% of the estimated synergies. On the contrary, the telecommunication industry achieved the least amount of cost synergy with the realization of only 61-65% of the cost synergy estimated. Based on these findings, even if merger activities effectively lead to cost synergy gain, the realized cost synergy is to a large extent lower than the pre-merge estimations.

(3)

1

Introduction

Mergers and Acquisitions (M&A) are one of the fast mechanisms by which a company can grow. This quick growth is attributed to both size and firm value (Maksimovic, Phillips & Prabhala, 2011). M&As are commonly referred to as marriage agreements in the corporate world, can take on multiple forms (Pepall et al., 2014). The Classification of M&As is based on the type of relationship the firms had before the merger or acquisition. There are three major categories of M&As; namely vertical, horizontal and conglomerate. Vertical M&As happen when a firm purchases another firm from its vertical production chain despite being in a different industry (Pepall et al., 2014). On the other hand conglomerate M&As occur when an entity is purchased by a firm that’s in a completely different industry. Finally, horizontal M&As occur when two firms in an identical industry decide to come together. Even though vertical M&As might lead to monopolistic power to the acquiring firm, the antitrust and regulatory authorities focus to a large extent on horizontal M&As.

Based on their benefit or harm, horizontal M&As effectively divide the public opinion. The major perspectives in regards to horizontal M&As could be categorized into two theories namely, market concentration theory and efficiency market theory. The market concentration theory, supported by the antitrust authorities emphasizes that anticompetitive harm is an increasing function of concentration(Farrell & Shapiro, 1990). In other words when market concentration decreases, predominantly due to horizontal M&A, anticompetitive harm increases. On the other hand, the efficiency market ideology highlights the importance of M&As in terms of attaining efficiency in the market. This ideology shows how successful M&As can shift the production from inefficient firms to efficient ones (Maksimovic, Phillips & Prabhala, 2011).

This research paper focuses specifically on evaluating the benefit or the harm of horizontal M&As form cost efficiency point of view. Special focus is given to two more additional factors, namely the impact of GDP and deal value on total cost. These two factors are particularly chosen due to their direct relation to both the independent and dependent variables, total cost and merger activities respectively. Answering the research question, namely the effect of a horizontal merger on cost synergy, is crucial because it will enable the market regulatory and antitrust authorities to analyze the advantages and disadvantages of a proposed M&A from an additional factor other than the Lerner index. In the meantime, evaluating the benefit of a merger from a cost synergy point of view is also important because most research on merger specifically focus on value creation and revenue synergies rather than cost reduction. Moreover by answering the second part of the research question - the comparison between the estimated and the realized cost synergies - will enable firms to assess their performances after a merger deal.

(4)

2 Based on the ordinary least squares (OLS) estimation carried out in four major service industries in North America, Mergers and Acquisitions with statistically significant results lead to a considerable decrease in total cost. This reduction in total cost leads the highest cost synergy gains of 1.86% and 1.66% in the telecommunication and transport industries respectively. The two remaining industries, namely the insurance as well as the hotel and restaurant industries, generate a lower cost synergy of 1.22% and 1.36%. Nevertheless, none of the deals chosen in the above-mentioned industries manage to obtain the pre-merge cost synergy estimations.

The first section of this paper focuses on literature review, where detail the different perspectives regarding the benefit and harm of horizontal M&As will be presented supported by empirical findings. The second part will discuss the methodology employed for this research. The research method will be followed by the third sections where my findings are discussed before the conclusion.

Literature review

Horizontal M&As occur for various reasons such as an incentive to increase market power by increasing firm size and value as well as the strong ambition to exploit comparative advantage within the industry (Maksimovic, Phillips & Prabhala, 2011). In contrast, the acquisition (merge) of two competitors in a market could also lead to cartel formation which ultimately would lead to negative externalities for consumers and non-participating firms(Farrell & Shapiro, 1990). Consequently based on the above two major point of views regarding the motivations of horizontal M&As, they are considered beneficial by some while harmful by others.

On the one hand, free-market advocating economists regard horizontal M&As as a beneficial system that illuminates dysfunctional or inefficient firms from the market(Alhenawi & Krishnaswami, 2015). Meanwhile, market efficiency ultimately leads to significant improvement in performance of the overall economy (Stillman, 1983). Furthermore merging companies strongly argue that there is an incentive to merge due to large synergy generated from M&As (Rashid & Naeem, 2017). These synergies arise from information and organizational efficiency as well as economies of scale and scope. While factors such as expertise, monopoly and efficiency gains and tax savings from operating losses also have a positive influence on synergy formation (Pepall et al., 2014). Ultimately experimental results on firm performance and value also illustrate an increase in performance and value of a target firm as one of the merger synergies (Alhenawi & Krishnaswami, 2015).

(5)

3 Synergies occur when the combination of two individual parts leads to the creation of a value that’s higher than the separate individual parts (Schosser & Wittmer, 2015). Subsequently, cost synergy is defined as the reduction of cost by the merged company which is lower than the cost the individual companies would have had they been operating individually. In addition, Schosser and Wittmer (2015), on their case study on synergies in airline mergers, also added that “the value enhancement in synergies can derive either from fewer input factors to produce the same output or a higher output generated from constant input”. Both enhancements are in line with the relationship between efficiency and added value creation. Cost synergies in the industries chosen arise from the elimination of redundancies. These redundancies could potentially be from processes, assets or resources. On the other hand, according to Alhenawi and Krishnaswami (2015) synergy creation is attributed to the sharing of research and expertise between the merged firms as well as through higher “administrative efficiency” that is gained from “managerial scarcity”.

However synergies, specifically cost synergies, are hard to analyze when it comes to mergers or acquisitions. The most commonly considered perceptions in regards to mergers and acquisition are that cost synergies are either predominantly non-extant in reality, (Pepall et al., 2014) or take a considerable time to materialize (Alhenawi & Krishnaswami, 2015). Therefore this ambiguity effectively lead to the two contrasting thoughts in regards to horizontal M&As, namely they lead to efficiency gain or predominantly to considerable market power followed by monopolistic features. These monopolistic features include; increase in price and decrease in total output (Farrell & Shapiro, 1990).

Among the economists that claim the disadvantage of horizontal M&A, we find theories such as dominant firm model and Cournot-Nash Equilibrium that emphasize the negative externality of horizontal M&As. This externality is emphasized by an increase in equilibrium market price (Stillman, 1983). This is in line with the regulatory laws imposed by various antitrust authorities. For instance in the United States, “Section 7 of the Clayton Act (as amended by the Celler- Kefauver Act) prohibits mergers that "substantially decrease... competition or tend... to create a monopoly" (Farrell & Shapiro, 1990). In addition, in their equilibrium analysis regarding horizontal mergers, Farrell and Shapiro (1990) also disclose that in order to have a decrease in price from M&A the economies of scale and realized synergies obtained from the merging have to be considerably large. Furthermore, they also emphasize that the synergies needed to decrease the equilibrium price after the merge is significantly high the inelastic the market demand is and the higher the market share the firm has. Therefore based on this analysis they argue that for the wellbeing of non-participating firms as well as consumers, strict merge regulation that is based on realized synergies is advised.

(6)

4 It is also crucial to point out that recent empirical findings also demonstrate the shortcoming of horizontal M&A from the target firms perspective. According to Healy, Palepu and Rubak (1992) Target firms line of business shows a considerable loss right after the merger which contradicts with the perspective that M&A leads to increase in value for the firm. In other words, the merge might increase the overall value of the company but it might also lead to losses in a certain part of the firm.

On the contrary, researchers arguing the advantage of mergers and acquisitions illustrate its benefit from comparative advantage perspective. For instance, empirical evidence by Maksimovic, Phillips, and Prabhala (2011) illustrates that M&As are predominantly associated with attaining higher managerial comparative advantage within a specific industry. Managers of an efficient firm try to benefit from their comparative advantage by obtaining control over another mismanaged entity in the same industry. According to their finding on post-merger restructuring, Maksimovic et al. (2011) discovered that M&As in similar industry significantly lead to an increase in production and operation margins. This increase in operating margin is attributed to reduction of sales, administrative and general expense. Moreover, supplementary findings by Penas and Unal (2004) illustrate that M&A in banking and financial sector is beneficial as it is considered by participants of the bond market as a default-risk reducing event. This is due to the significant high return they receive pre-merge announcement date. This increase in returns is primarily attributed to diversification and attaining too big to fail status.

It is also crucial to point out that further researches carried out on the performances of merged firms have conflicting results in terms of the link between performance and productivity. For instance, experimental findings from 50 of the largest mergers in the U.S. between 1979 until 1984 demonstrate a significant increase in productivity relative to their industry competitors (Healy et al., 1992). However, other findings point out that the increase in performance of a merged entity is attributed to other factors such as diversification gain and economies of scale rather than productivity (Penas & Unal, 2004). Furthermore, Farrell and Shapiro, (1990) also concluded that if M&As lead to no or significantly lower synergy than estimated, it will lead to an increase in price and eventually leading to consumer welfare loss. However in contrast to this finding, on their research paper about the gain of M&As in the banking sector, Penas and Unal (2004) demonstrated that even non-synergistic M&As could lead to beneficial outcomes if it contributes to a lower risk of default. Hence based on these discoveries evaluating the benefit or harm of horizontal merger crucially depend on the industries chosen.

(7)

5

Research Method

In order to evaluate the presence of cost synergies due to the merger/acquisition (M&A), I carried out a quantitative research to compare the realized cost synergy of merged firms with similar other firms in the same industry that are not participating in the M&A. Prior to performing the research, it's crucial to define certain terminologies as well as the dependent, independent and control variables. I have defined cost synergy as the reduction in sales, general and administrative (SGA) expenses that arise from the M&A. Meanwhile, since it’s difficult to do the regression on cost synergy, I will measure it as a considerable decrease in total cost. The total cost will be measured as the difference between the operating revenue the company generated and the profit before tax. Moreover in the regressions to be carried out the Total cost will be used as the dependent variable of the research while horizontal M&A is the independent variable. It is also crucial to point out that this independent variable is a dummy variable taking the value 1 for merging firms and 0 for non-merging once. Subsequently, to eliminate the effect of other factors as a means of cost reduction which effectively influences cost synergy, overall GDP and deal values are used as control variables.

To adequately answer the research question I will scope the research on horizontal M&As in four North American service industries. These industries will be insurance, telecommunication, transportation and finally hotel and restaurants. The service industry, in general, is chosen because it is the largest industry in terms of GDP contribution in North America (Encyclopaedia, 2018). Similarly, the insurance industry is chosen as it represents the financial aspect of the service industry. Meanwhile, the telecommunication industry is chosen due to its’ homogeneity in the service it provides. While the other two other industries namely; hotel and restaurant as well as transportation are chosen due to their similarity in terms of the merge activities within the industries. Furthermore, it is crucial to choose various industries in order to tackle the criticism that is associated with most other merger studies. This criticism arises from the fact that these studies cover a large number of mergers in different industries which leads to a lack of merger-specific information.

Ultimately the necessary data for this research paper will be extracted from Zephyr website, which presents an insight of annual M&A deals and transactions in the world. In addition, the necessary financial data that is needed to calculate the cost savings will be extracted from Compustat, which offers the income and financial statements of North American firms. The data for this research is collected on the basis that the acquirers country is in the North American geographical region. The M&A deals in this research paper are regarded to be a complete combination or control of assets. In other words, I have only taken firms where the acquirer has more than 50% stake in the acquired firm after the merger.

(8)

6 I will also like to declare that while extracting the data on merged firms I have only taken the merger or acquisition where the deal value was available. Moreover, as cost savings are considerably hard to estimate immediately after the M&A, the total cost is calculated three years after the merger. Three years is specifically chosen because it enables the firm to effectively integrate the two companies facilitating the cost synergies. In addition, it also helps me to eliminate those firms that are involved in multiple mergers and acquisitions in a short period of time, which could influence the regression results. To satisfy this assumption the data collected will be deals that happen within the specific industries from 2008 until 2015.

Finally, in order to compare the realized cost synergy with the estimated cost synergy, I have created a new subset of M&A deals where synergies are explicitly mentioned. However, this was only feasible for the deals with largest deal value. Hence, it is important to understand that a general remark is drawn based on the limited data obtained from merger press releases.

The comparison technique used to evaluate the cost synergies gained by firms participating in M&A and their competitors was replicated from the similar method employed by Schosser and Wittmer (2015). In their comparative case study, Schosser and Wittmer (2015) analyzed the revenue and cost synergies between different airline mergers. When comparing their cost synergy between merging and non-merging firms, it is important to point out that the firms that are compared are to a certain extent in a similar financial state in terms of revenue and expense before the M&A.

Hypothesis

To analyze the impact as well as the statistical significance of horizontal M&A on cost synergy I will follow the Ordinary Least Squares (OLS) technique employed by Rashid and Naeem (2017). In their paper, which examines the effect of mergers on corporate performance in Pakistan, Rashid and Naeem (2017) used OLS method to observe the impact of merging on corporate performance. In this paper, OLS regression is used predominantly to observe the impact of mergers in the presence of other factors that could significantly affect the cost savings of the firms chosen such as deal value and GDP. Similar to Rashid and Naeem (2017), who also used a dummy variable to see the effect of M&A on profitability the sign of the dummy variable indicates whether the merge leads to total cost reduction. Explicitly a negative coefficient that is statistically significant means that the merge effectively leads to cost synergy and ultimately cost synergy.

First to observe the effect of M&A on cost synergy I will use the dummy Independent variable Merger which takes the values 1 and 0, with and without horizontal M&A respectively. I hypothesize that the presence of M&As will lead to an increase in cost synergy. This increase in cost synergy is once again presented as the decrease in total cost in the regression. My null hypothesis

(9)

7 states that M&As have no effect in cost synergies whereas my alternative hypothesis underlines that they have a negative effect in terms of total cost. This hypothesis is mathematically expressed as:

H0: β = 0

H1: β < 0

Moreover, the regression model that would be used for this research is stated as follows: 𝑪 = 𝜶 + 𝜷𝑴𝒆𝒓𝒈𝒆𝒓 + 𝜸𝑮𝑫𝑷 + 𝜹𝑫𝒆𝒂𝒍𝒗𝒂𝒍𝒖𝒆 + 𝜺

Where α = the constant term

β = coefficient of dummy variable merger γ = GDP coefficient

δ = deal-value coefficient

ε = a random error; with zero mean and constant variance

Subsequently, to investigate the significance of the above-mentioned coefficient, I will compare the cost synergies discovered from my regression to the cost synergies projected before the M&A. Ultimately similar to Rashid and Naeem (2017), the OLS regression is chosen as it examines the effect of horizontal M&A in the presence of the control variables. This method is preferable because it has demonstrated its considerable importance with a small sample as illustrated by their considerable findings.

Empirical results and discussion

The effect of mergers and acquisition on the total cost of North American insurance, telecommunications, transportation and hotels and restaurant industries is presented in Tables 1-4 respectively.

(10)

8 Table 1a OLS regression results for the effect of a merger in Insurance companies

Dependent Variable = Cost

GDP -1935.37*** (-2.31) Deal value -.081 (-0.20) Merger -5709449*** (-2.42) Constant 7415522 (0.80) Number of observations 78 Adjusted R2 11.79%

This table presents the regression results of the of total cost with the variable merger as a dummy variable taking the value 1 for merger and 0 for Non-merger. The t-statistics are contained in the parenthesis

***represents significance at the 5% level for a one-sided test.

Table 1b Correlation matrix of coefficients of regress model e(V)| dealvalue gdp merger _cons ---+---

dealvalue 1.0000 gdp -0.1654 1.0000 merger -0.1561 -0.0790 1.0000 _ cons 0.1623 -0.9985 0.0392 1.0000

(11)

9 The impact of M&A on cost savings in the insurance industry

As clearly illustrated in Table 1a, the dummy variable merger has a statistically significant and negative effect on total cost as the coefficient is -5709449 with a p-value of 0.018, which makes it statistically significant for 5% level of significance. This finding is in line with my hypothesis that M&A lead to considerable cost saving in the insurance industry. Moreover, the estimation also shows the positive effect of GDP on cost saving as the coefficient for the independent variable GDP is once again negative (-1935.37) with a p-value of 0.024 which is significant at 5% level of significance. However, unlike my previous presumption, that deal value which contains valuation of future synergies does not significantly affect cost savings. Deal value, despite also having a negative coefficient, has a p-value of 0.884 which makes it insignificant a 5% level of significance. The insignificance of deal value is also apparent for the hotel and restaurant industry. To illustrate that these two insignificances were not attributed to multicollinearity between the independent variables, a correlation test was carried out for each industry which is illustrated in tables 1b,2b,3b, and 4b. The tables effectively show that none of the coefficients are strictly correlated with each other. However, it is important to point out that GDP and the constant term are strongly correlated in all industries.

Table 2a OLS Regression results for the effect of a merger in Telecommunication companies

GDP -296.27 (0.96) Deal value -.761** (-3.5) Merger -4337204** (-2.89) Constant -1183728 (-0.96) Number of observations 96 Adjusted R2 17.97%

(12)

10 Table 2b Correlation matrix of coefficients of regress model

e(V) gdp dealvalue merger _cons ---+---

gdp 1.0000 dealvalue -0.1117 1.0000 merger -0.2574 -0.1321 1.0000 _cons -0.9961 0.1109 0.1921 1.0000

The impact of M&A on cost savings in the telecommunication industry

Subsequently while observing the effect of merger activities in the cost savings of North American telecommunication industry, it is once again positive and statistically significant. As clearly illustrated in Table 2a, the dummy variable merger has a negative coefficient (-4337204)and it is statistically significant with a p-value of 0.005, which makes it statistically significant at 1% significant level. This once again leads to the rejection of my null hypothesis, namely the fact that the merger has no effect on cost synergy. Moreover the fact that it is significant in 1% level as well as the magnitude of the coefficient which is higher than the coefficient of the insurance industry visibly display the strong effect of merger activity on cost saving in the telecommunication industry. According to my results, M&As in the telecommunication industry would lead to a total cost reduction of roughly 4.3 million dollars after three years. In addition, among the industries chosen, the telecommunication industry is one of the industries whereby the control variable deal value also has significance. In this industry deal, value has a negative coefficient (-0.761) with p-value 0.001 which makes it significant at 1%.

(13)

11 Table 3a OLS Regression results for the effect of a merger in Transportation companies

GDP 13.013 (0.09) Deal value -.253*** (-2.24) Merger -1603587*** (-2.11) Constant -624659.2 (-2.24) Number of observations 50 Adjusted R2 14.38%

Table 3b Correlation matrix of coefficients of regress model e(V) merger dealvalue gdp _cons ---+---

merger 1.0000 dealvalue -0.1556 1.0000 gdp 0.0638 -0.1748 1.0000 _cons -0.1515 0.1733 -0.9948 1.0000

The impact of M&A on cost savings in the transportation industry

The impact of Merger on cost saving in the North American transportation industry is presented in table 3a. From the table is apparent that the transportation industry is the industry with the second lowest cost savings after the hotel industry. In this specific industry, cost decreased only

(14)

12 by 1.6 million dollars three years after the merger. This coefficient with a p-value of 0.04 is still statistically significant at 5% significant level, which illustrates the positive effect of merger activities on cost savings.

Table 4a OLS Regression results for the effect of a merger in Hotel & restaurant companies

GDP 56.968*** (0.65) Deal value -.333 (0.14) Merger -995568.7*** (-2.29) Constant -2348282 (-0.67) Number of observations 12 Adjusted R2 14.05%

Table 4b Correlation matrix of coefficients of regress model e(V) gdp dealvalue merger _cons ---+--- gdp 1.0000 dealvalue -0.2725 1.0000 merger 0.0775 -0.2119 1.0000 _cons -0.9955 0.2366 -0.1320 1.0000

(15)

13 The impact of M&A on cost savings in hotel and restaurant industry

Finally, we have the hotel and restaurant industry, the industry with the lowest cost saving of close to 1 million dollars, precisely (995568.7$). This sum despite being limited in comparison to the other industries chosen is also statistically significant at 5% significant level as it has a p-value of 0.037. This finding clearly shows the merging advantageous from cost saving perspective. However similar to the insurance industry all the coefficients of the independent variables along with the constant term show statistical insignificance despite no correlation within themselves.

On average the cost synergies obtained from merger activity amount to 1.50% of the total cost incurred in the industries chosen. In particular, the cost synergies from M&A amount to 1.22% for the insurance industry, 1.86% for telecommunication industry as well as 1.36% and 1.66% for hotel and restaurant and transportation industries respectively. Meanwhile, these figures are obtained by dividing the difference in cost total cost between merged firms and non-participating firms and dividing it by the total cost. Therefore cost synergies of each industry is presented in Table 5. The presence of this synergies clearly answers the first research question namely the existence of cost synergy due to the presence of merger activity.

Table 5 composition of cost synergies in the chosen industries

Table 6 presents the deals with synergy estimations are explicitly mentioned. Based on the data obtained the realized cost synergies are computed as the percentage of the estimated cost synergies. Observing the percentage of the realized cost synergies achieved, it is apparent that none of the deals manage to realize their cost synergy estimations. However, it is apparent that all the specific deals have accomplished more than 50% of their estimations. For instance, in the telecommunication industry, both deals manage to realize 64.2% and 61.0% of their estimation. On the other hand, the subsequent three deals in the hotel and restaurant manage to achieve cost synergies of 87.2%, 93.8%, and 83.4% respectively. Meanwhile, in the transportation industry, where I specifically found data on Airline mergers, the realized cost synergies are considerably higher with the merged firms attaining 91.2%,95.4%, and 86.45% of their cost synergy estimations. Ultimately in the insurance industry, the industry where realized cost synergy has the highest variance as merged firms managed realized cost synergy amount from 64% to 90% of the estimated cost synergy.

Industry Cost saving($) Cost synergy

Insurance 5709449 1.22%

Telecommunication 4337204 1.86%

Hotel and restaurant 995568.7 1.36%

(16)

14 Table 6 Initial synergy estimates and percentage attributed to cost synergy

Source: Own calculations, data from company synergy estimates and press releases. For more information from the press releases1

For better comparison, the average realized cost synergies of each industry that are presented in table 6 are once again presented in a chart form in graph 1. As displayed clearly, both hotel and restaurant and transportation industries achieve the highest average realized cost with well above 80% of their estimations.

Graph 1 Comparison of realized synergies across the different industries

1

For more information, AT&T and Centennial deal https://soc.att.com/2KjPi6L , Verizon and Vodafone deal https://vz.to/2tF9KEX, Ihop and Applebee's https://nbcnews.to/2MS8R4s , Chuck E cheese and Peter Piper Pizza https://prn.to/2tAdiYP , Wendy's and Arby's restaurant group https://abcn.ws/2tzhDvp , Delta and Northwest Airline https://bit.ly/2Kjpzv4, Republic and Mokulele Airlines https://bit.ly/2K5vyVe , Southwest and AirTran Airlines https://nyti.ms/2yDhflp,

Nationwide Mutual and Harleysville Inc. https://bit.ly/2Kc8nrB, Doctors company insurance and American Physicians Capital Inc. https://bit.ly/2txv9zD, MetLife and American Lifehttps://bit.ly/2lxuHhi

M&A deals Estimated total synergies(million$) Cost synergy as % of total cost

% of realized synergy AT&T & Centennial

Communications 37.5 1.90 64.20

Verizon and Vodafone 41.25 2.00 61.00

Ihop and Applebee's 50.00 1.56 87.20

Chuck E cheese and PeterPiper Pizza

30.00 1.45 93.80

Wendy's and Arby's restaurant group

45.00 1.63 83.40

Delta and Northwest Airline 55.00 1.82 91.20

Republic and Mokulele Airlines 52.00 1.74 95.40

Southwest and AirTran Airlines 44.00 1.92 86.45

Nationwide Mutual and

Harleysville Inc. 39.00 1.40 74.41

Doctors company insurance and

American Physicians Capital Inc. 25.00 1.30 89.48

MetLife and American Life

(17)

15

Conclusion

In this research paper, I empirically examined the effect of Mergers and Acquisitions on the cost savings of companies in various industries in North America based on data collected between the period 2008 until 2015. The results of the OLS regression performed on cost saving by the dummy variable merger effectively illustrates that M&As lead to considerable cost synergies in all the industries chosen. Telecommunication industry is the industry where a merger has the most impact, as it leads to the creation of 1.86% of cost synergy. On the other hand mergers in the insurance industry lead to the lowest amount of cost synergy, with cost synergy of only 1.22% attained.

Simultaneously while comparing the difference between the estimated and the realized synergies, it is apparent that none of the companies matched their estimated cost synergy. In the transportation industry, the industry with the highest realized percentage, the merged companies attained on average 91.02% of their estimated synergies. Meanwhile, in the telecommunication industry, the industry average realized cost synergy was merely 62.60% of the estimated cost synergy making it the industry with the lowest cost synergy realized. However, it was also evident that all the M&A deals used in this paper have achieved more than 60 percent of their estimation.

One of the internal limitations of this paper is that the estimation values are taken from extremely smaller sample hence would be hard to regard it as industry representation. Furthermore, I also would like to remind the reader that I used a decrease in total cost as synergy measurement which makes it hard to attribute the synergy gains to specifically be attributed to either fixed or variable cost.

0.00% 20.00% 40.00% 60.00% 80.00% 100.00%

Telecomunication Hotel and restaurant Transportation Insurance Esti m ate d c o st sy n e rg y

Average realised cost synergy per industry

(18)

16 In other words, it is not clear whether the synergy gained is due to variable or fixed cost. Moreover, the reduction in the total cost could be attributed to other factors which are not addressed in this paper. Additionally, the total cost needed for the OLS regression was computed by taking the difference between operating revenue and the profit that the company generated. This method was derived from similar procedure employed previously by Schosser and Wittmer (2015), who assumed profitability to be the function of cost and revenue.

In terms of External limitation, it is impossible to make a general remark in regards to realized and estimated cost synergies in the different industries based on the limited data obtained. Furthermore as that the estimation values are taken from an extremely smaller sample it would be particularly difficult to consider it as an industry representative.

Additional research is required to observe the impact that horizontal mergers have on cost synergy in different industries than the one chosen. As the effect could be different from the one found in this paper. In addition, future researches could include factors such as the decrease in expenditure or deflation in addition to the factors used in this paper to observe the substantial cost synergy that is attributed to efficiency gain.

(19)

17

References

 Alhenawi, Y., & Krishnaswami, S. (2015). Long-term impact of merger synergies on performance and value. The Quarterly Review of Economics and Finance,58, 93-118. doi:10.1016/j.qref.2015.01.006

 Service Industry In North America. (2018). Retrieved from

https://www.encyclopedia.com/social-sciences-and-law/economics-business-and-labor/businesses-and-occupations/service-industries

 Farrell, J., & Shapiro, C. (1990). Horizontal Mergers: An Equilibrium Analysis. The American Economic Review, 80(1), 107-126. Retrieved from

http://www.jstor.org/stable/2006737

 Healy, P., Palepu, K., & Rubak, R. (1992). Does Corporate Performance Improve After Mergers? Journal of Financial Economics,31, 135-175. doi:10.3386/w3348

 IMF -- International Monetary Fund. (2018). Retrieved from http://www.imf.org/

 Maksimovic, V., Phillips, G., & Prabhala, N. R. (2011). Post-Merger Restructuring and the Boundaries of the Firm. Journal of Financial Economics,102(2), 317-343.

doi:10.3386/w14291

 Penas, M. F., & Unal, H. (2004). Gains in Bank Mergers: Evidence from the Bond Markets. Journal of Financial Economics,74, 149-179. doi:10.2139/ssrn.352700

 Pepall, L., Richards, D. J., & Norman, G. (2014). Industrial organization: Contemporary theory and empirical applications(5th ed.). Hoboken, NJ: John Wiley & Sons.

 Rashid, A., & Naeem, N. (2017). Effects of mergers on corporate performance: An empirical evaluation using OLS and the empirical Bayesian methods. Borsa Istanbul Review,17(1), 10-24. doi:10.1016/j.bir.2016.09.004

 Schosser, M., & Wittmer, A. (2015). Cost and revenue synergies in airline mergers – Examining geographical differences. Journal of Air Transport Management,47, 142-153. doi:10.1016/j.jairtraman.2015.05.004

 Stillman, R. (1983). Examining antitrust policy towards horizontal mergers. Journal of Financial Economics,11(1-4), 225-240. doi:10.1016/0304-405x(83)90012-0

(20)

18

 Wharton Research Data Services. Retrieved from https://wrds-web.wharton.upenn.edu/wrds/ds/compd/funda/index.cfm?navId=83  Zephyr. Retrieved from