The effects of Mergers & Acquisitions on
target firm performance
An aggregate European research
Master Thesis Corporate Finance
1 July, 2018
Student: Lars Dieperink
Student number: 10648623
Acknowledgement
First, I would like to thank the University of Amsterdam for the great master’s Finance program that they provide. This year has been truly inspiring and I have gained thorough knowledge in the field of finance. I have furthermore gained practical experience through the numerous interesting group projects and presentations, which also allowed me to enhance my social and communicative skills.
Second, I would like to thank Dhr. dr. V.N. Vladimirov for his supervision. Through his excellent finance knowledge and his research experience, he was able to precisely explain what he expected from me.
Statement of originality
The author, Lars Dieperink, declares full responsibility for the contents presented throughout the entire study. The work described is original and only sources that were cited from the reference list are included in all sections as presented in the table of contents. The University of Amsterdam (UvA), particularly the Faculty of Economics and Business, is solely responsible for the supervision of the presented work and not for the contents of it.
Abstract
This paper investigates whether takeovers affect target firm’s performance. The analysis is conducted on 2375 European target firms, in which 96.93% are privately held, that were acquired in the period from 2009 to 2016. With the inclusion of four key accounting performance measures (e.g., ROA, ROS, Net Income growth, and Sales growth) and three prominent research models (e.g., an OLS model, a change model, and a difference-in-difference model) target firm performance changes are examined. This paper clearly shows that target firms performance measures are not affected by the takeovers, while identical results are found between the particular models. Further, no compelling differences in performance are found for domestic versus cross-border target deals, and SMEs versus Large Enterprises target deals. However, distinguishing evidence is found for deals in which medium or high cultural distance firms are compared to low cultural distance firms. Moreover, firms that enclose a medium or high cultural distance reveal a greater improvement in performance than firms that encompass low cultural distance post the M&A. Interestingly, the bulk of the results indicate that acquired firms in general tend to underperform the employed control groups prior to the acquisition. The findings presented in this paper provide new insights, while it also complements existing evidence, and on the other hand it contradicts former claims.
Keywords: M&A, accounting performance, private target firms, logit, propensity-score matching, OLS, change-model, difference-in-difference model
Table of Contents Acknowledgement ... 2 Statement of originality ... 3 Abstract ... 4 1. Introduction ... 6 2. Literature review ...10
2.1 Merger & Acquisition motives... 10
2.2 Merger & Acquisition performance ... 12
2.3 Merger & Acquisition cross-border ... 17
3. Hypotheses ...19 4. Methodology ...23 4.1 Performance measures ... 23 4.2 Control variables ... 24 4.3 Benchmark methods ... 27 4.3.1 OLS model ... 28 4.3.2 Change model ... 28 4.3.3 Difference-in-Difference model ... 29 4.3.4 Endogeneity ... 33 5. Data ...34 5.1 Data availability ... 34 5.2 Sample construction ... 35 6. Results ...40 6.1 OLS model ... 40 6.2 Change model ... 43 6.3 Difference-in-Difference model ... 49 7. Robustness ...52 8. Conclusion ...54 9. Discussion ...58 References ...60 Appendix ...66
1. Introduction
Mergers and Acquisitions (henceforth M&As) are a popular strategy for firms, while they present an important alternative for strategic expansion. The term M&A is commonly used and often proclaimed as if ‘mergers’ and ‘acquisitions’ were synonyms. Even though both terms technically have a different meaning, they are uttered throughout this study as equals. In short, this paper focuses on understanding M&As in Europe. The bulk of previous research on M&A activity is confined to the United-States (Dutta and Jog, 2009; Loughran & Vij, 1997) and United-Kingdom (Agyei-Boapeah, 2013), whereas a European study is less pronounced, especially on an aggregate level and privately held target firms. Moreover, many papers analyze stock returns around acquisitions, fewer studies examine changes in operating performance.1 Hence, despite the fact that M&A is widely used for research purposes, there is plenty yet to be uncovered particularly in Europe. Also, there is no consensus throughout literature regarding the post-acquisition target firm effects, while the presented results are oftentimes contradictory and puzzling. Interestingly, using novel data one can see how target firms behave even after the acquisition, something which cannot be done in the United States. In contrast to the United States, most European countries require firms to report financial data publicly on an unconsolidated basis, even if they are privately held. Due to this disclosure requirement, a total sample of 2375 deals is constructed in which 96.93% of the target firms are privately held. Furthermore, cross-border M&A is extremely important nowadays for strategic purposes, which can be seen from the total deals as 65.75% of the deals is domestic. More precisely, one-third of the obtained deal sample implies to be an international M&A. Some papers are starting to explore this interesting setting but there are many questions unresolved (Erel et al., 2014; Larrain et al., 2016). The M&As can have a thorough impact on firm’s growth prospects and long-term attitude. However, actively participating in M&As does accrue a significant amount of risk. The rate of successful take overs is estimated to be roughly 50%, yet M&A has recently reached a new all-time high record –e.g., in 2015- reaching a total deal worth of US$4.28 trillion. Numerous consequences are described for the seemingly low percentage, among
1 Stock returns refers to the market performance analysis. The empirical analysis conducted is also known as
an event study. The main variable used to investigate M&A performance is the cumulative abnormal return, in short CAR. Firms have to be publicly listed in order to obtain stock data. Operating performance refers to the accounting-based analysis. Variables from the financial statements of the firms are used to examine
which are integration risk following the transaction, overpayment in acquiring the targeted firm, and culture clashes between both firms. Thus, this paper aims to provide new insights withal complementing existing literature with respect to the effects of the M&A on target firm performance. The latter is also important, while the main idea of an M&A is value creation to both the shareholders as well as for the overall community.
M&A performance does not have a well specified analytical framework and some researchers claim that the literature is at risk to fall into a so-called specification trap. Gomes et al. (2013) argued in their research that it is too complex and the process to extensive in order to generalize post-performance changes. Das and Kapil (2012) conducted a systematic review of empirical M&A research on explaining its performance. After five decades of M&A research, the findings on M&A performance are diverse and rather inconsistent with each other. They noticed that the majority of the empirical studies use only one category of acquisition performance measures, in short accounting measures or market-based measures, and at times, just a single measure. Furthermore, they believe that this is inadequate as neither the accounting data nor the market performance can fully capture all the strategic considerations of an M&A, and it is necessary to observe multiple
Figure 1: a pictorial scheme of the most commonly used M&A performance measures.2
2 Meglio and Risberg (2011) provided the figure in their paper. The sample in the paper consisted of numerous commonly used journals to provide a thoroughly detailed and refined impression of the M&A performance measure development. In total, 169 papers were examined.
measures of performance to explain the value creation objectives of M&A. In line with Das and Kapil (2012), King et al. (2004) also mentioned that empirical researches have not consistently identified antecedents for predicting post-acquisition performance and that there is very little overlap across studies in the variables used to explain post-acquisition overall performance. Lastly, Meglio and Risberg (2011) concluded in their paper that M&A performance does not have a universal design. From the 1960s onwards, many papers used different performance measures to investigate performance changes post the M&A activities. Again, a lack of consensus is seen throughout existing literature, while also performance validity differs among the measures which can be quite puzzling. Following the guidance of the detailed literature reviews of the papers by Das and Kapil (2012), King et al. (2004), and Meglio and Risberg (2011) this study analysis post-acquisition performance using several key accounting performance indicators.
The main advantage of the accounting-based performance measures is that privately held firms can be investigated, while they measure actual performance and not investors’ expectations (Grant et al., 1988), and potential synergies are best described in ratios such as return on assets (Hitt et al., 1998). So, these performance indicators present explicit firm characteristics and exposures in the operating climate, conditional to accounting rules. More interestingly, this study can therefore additionally investigate what would have happened to the firm if it would not have been acquired. Moreover, this paper employs three different benchmark methods, The Ordinary Least Squares model (henceforth OLS), a change model, and a difference-in-difference model. Including several approaches enhances the findings, overcomes weaknesses of the individual methods and addresses endogeneity concerns. Interestingly, the endogeneity issues have not been addressed in many papers.
In that way, the current study aims to contribute to the controversy on M&A post-performance. Current literature provides ambiguous results, while some papers argue that the take overs improved target firm performance, others obtain a decline in performance, and few fail to procure any results. Thus, the first predominant purpose of this study is to contribute to the existing literature, while providing detailed results to answer the question whether there is an observable effect of the M&As on target firm performance based on the three models incorporated. As aforementioned, current literature employs oftentimes a particular key performance measure thereby taking a specific model into consideration. Obtaining results in all employed models would provide a clear-cut conclusion that would
withstand undoubtedly, while at the same time addressing the endogeneity concerns. The second main contribution of this paper is the in depth research on domestic versus cross-border deals, small and medium enterprise (hereafter SME) targets versus large enterprise targets, and cultural distance between firms, while these comparisons could all effect the post-acquisition performance. As previously stated, cross-border deals have become increasingly popular for firms since the last decades for strategic purposes, besides also here the vast majority of the papers find contracting results. Furthermore, for SMEs the general thought is that it is relatively easier to combine departments than for large enterprises, while incorporating such a firm takes much time and effort due to their size. In addition, as the international expansion reaches new heights, cultural distance between firms is increasingly important, while organizational styles and methods are most likely to differ significantly, consequently bearing conflicts between the resources. Hence, this paper additionally aims to provide new insights with respect to the aforementioned discrepancies.
The bulk of the results imply that the M&As had no prominent effect on target firm’s performance, while an improvement was expected. Thus, the performance indicators as well as the models employed are consistent. Further, no clear conclusion can be interpreted from the findings regarding the domestic versus cross-border comparison, in which an advantage was wonted for the target firms in cross-border deals. The results remain moderately consistent, however, the findings do imply that target firms performed worse on average prior to the acquisition than their control group or matched firm respectively in both domestic and cross-border firm deals. In addition, the performance indicators for the SME versus large enterprise comparison fail to find clear distinguishing evidence. Some results were found, although to be able to make explicit concluding remarks these findings lack strength. Lastly, the results for the cultural distance comparison entail that medium or high cultural distance firm deals outperform low cultural distance firm deals. The opposite was expected; thus, the latter implies that the predicted culture clashes did not prevail.
The paper proceeds as follows. Throughout the next section a review of the existing literature is presented on M&A motives and performance. In section 3, the hypotheses construction elicited, followed by the methodology used for analysis referring to section 4. Further, the sample construction will be discussed in data section 5. The interpretations of the results are given in section 6. In addition, section 7 specifies the robustness checks, while section 8presents the concluding remarks and thereafter the discussion is described.
2. Literature review
This section starts by explaining the rationale behind an M&A followed by their post-performance changes exploited from existing literature. Many studies argue that an M&A is one of the mechanisms for firms to gain access to new resources through resource redeployment, subsequently increasing its revenues, efficiency and reducing the operational cost. These examinations can be divided into three groups: 1) studies reporting a significant increase in financial performance, 2) those that report a significant decrease, and 3) others that find insignificant changes in performances. Moreover, and as mentioned in the introduction, current literature finds contradicting results. Many papers examined performance with single performance indicators, while others included several common measurements. Besides, the vast majority of the papers used a single model in their research, which is one of the major reasons why these papers lack consensus. In addition, different models have different strengths and weaknesses and there is an endogeneity problem whilst using accounting performance measures that need to be addressed.
2.1 Merger & Acquisition motives
Several papers in current literature have extensively explained why firms actively perform an M&A. The rationale behind the M&As are important to bear in mind in order to be able to build clear hypotheses, which will be explained in section 3. Also, and as mentioned in the introduction, roughly half of the M&As seem to fail which hints huge risks, however acquisitions are extremely important due to their strategic purposes. Several papers and theories will be presented hereafter to comprehend on the M&A motivations.
Motis (2007) analyzed and summarized an extensive list of various merger motives that have been suggested in the literature. His research proposed a classification of the motives based on the residual claimants, which are mainly the managers of the incorporated firms or the owner, and on welfare effects. The motives of the merger that increases the value of the firm as a whole are shareholder gains, which are explained by the: obtained efficiency gains, economies of scale, economies of scope, economies of vertical integration through synergy gains, diffusion of know-how, R&D through cost savings, rationalization, and purchasing power. Furthermore, creating internal capital markets through financial cost savings, taxes, interest rates, diversification through enhancement or strengthen of market power, unilateral effects, coordinated effects, to raise entry barriers,
to spread their portfolio, to obtain multimarket contact, market for corporate control, and free-cash flow also increase firm value. The motives for managerial gains are explained by phenomenon’s as: empire building, hubris, and risk spreading or diversification. Hence, the merger motives depend on the two main groups, which are described by the surge of the firm value or the managerial gain. Also, there have been five merger waves thus far according to Lipton (2006), which emerged at the end of the nineteenth century. Lipton (2006) presented his paper midst the sixth wave, whereas the seventh wave emerged recently. Each wave is described by a concentration of the specific type of merger and peculiar industry.3 To be more precise, different motives were seen throughout the past years starting from the nineteenth century, whereas Motis (2007) addressed every possible motive respectively.
Furthermore, Berkovitch and Narayanan (1993) explained three fundamental motives for an acquisition which are commonly used. The first motive is the synergy motive, which proposes that economic gains appear through the merge of the resources. Moreover, the value of the merged firms exceeds the value of the firms that are valued separately due to the accompaniment (Andrade et al., 2001). Also, this motive is the most prevailing motive for the acquisitions. The second motive is the agency motive, which destroys value for the acquiring shareholders due to the fact that the acquisition is driven by directors’ well-being enhancement at the expense of the shareholders (Berkovitch & Narayanan, 1993). The agency problems arise when the CEO does not act fully in favor of its shareholders, also known as the agents, which means that firm value maximization is not his major occupation. The final motive that Berkovitch & Narayanan (1993) describe is the hubris motive, which leads to overpaying in takeovers and consequently also destroys shareholder value. The acquiring manager overvalues the target firm due to excessive confidence and optimism. While these hubris feelings are regularly justifiable, as proposed by their track record, they often cause irrational and noxious behavior.
In summary, several motives of an M&A were described, among which are increasing firm value and managerial gains explained by Motis (2007), whereas Berkovitch and
3 The first wave (1893-1904) was characterized by horizontal mergers. The second wave (1919-1929) by vertical integration. The third wave (1955-1970) by conglomerate M&As. The fourth wave (1974-1989) by the arrival of corporate raiders, hostile takeovers and congeneric mergers. The fifth wave (1993-2000) by the megadeals. The sixth wave (2003-2008) by globalization, shareholder activism, and private equity. Finally, the seventh wave (2011-onwards) by optimism.
Narayanan (1993) explained these M&As with three fundamental motives, including synergy, agency and hubris respectively. Several of these motives are related to both the acquiring firms as well as the target firms. In most of the cases the M&A is unbeneficial for the acquiring firm in the long run (Tuch and O’Sullivan, 2007), while the majority of the target firms are likely to benefit from the obtained synergies. This paper seeks to find evidence for the latter to be able to provide an answer on the question whether the M&As had an effect on the target firms. As aforementioned, this paper expects to find performance improvements due to the several important motives and the growth prospects. Yet, the opposite could be true due to the fact that the M&As accrue a significant amount of risk. A crucial conclusion from the research conducted on M&A synergy creation is that acquiring firms face challenges to consistently comprehend synergies that exceeds the acquisition premium (Ghosh, 2001; Powell and Stark, 2005).
Next subsection will elaborate on the post-acquisition performance evidence as proposed by several papers. The first half of subsection 2.2 provides papers that found performance improvements, while the second half presents papers that found performances decreases as well as papers that did not discover any performance changes.
2.2 Merger & Acquisition performance
Martynova and Renneboog (2006) conducted research on M&As in Europe in which a comprehensive overview is provided of the takeover market in the period 1984 until 2001. This paper is one of the first that fully exploits the aggregate performance of target firms throughout Europe. They characterize the main features of the domestic and cross-border corporate takeovers involving European companies. Further, they also provide detailed and proportionate information on the size and dynamics of takeovers in 28 Continental European countries, Ireland and the United-Kingdom. Their research supplements, amongst other factors, the type of takeovers, legal status of the target firm, takeover strategy, bid approach and method of payment. They find strong evidence that the means of payment has a significant effect on the share price of both the target as well as the acquirer. Moreover, target firms encountered large firm value gains, whereas acquiring firms hardly experienced any gains. In addition, their results are in line with the bulk of previous research which state that poor performance follows the acquisition.
Erel, Jang and Weisbach (2014) used a large sample of European acquisitions to conduct research on target firms' financial constraints, while acquisitions were likely to relieve these constraints. They document that the level of cash that target firms hold, the sensitivity of cash to cash flow, and the sensitivity of investment to cash flow all decline, while investment increases following the acquisition. These effects are more significant in deals that are more likely to be correlated with financing improvements. Moreover, acquisitions relieve financial frictions from the target firms, especially when the target firms are comparatively small. Thus, the takeovers resulted in a positive performance effect for the target firms. This finding is amplified by Stein (2003), while in his paper he explains that being part of a larger institution following an M&A the target firms are able to improve their financing. To be more precise, it is easier to raise debt through capital markets, while there is more collateral available, lower risk for the borrowers, and it is also possible to reallocate capital across divisions (Stein, 2003).
Powell and Stark (2005) conducted research on takeovers that were completed in the United-Kingdom between 1985 until 1993. The main focus is confined to the sensitivity of operating performance improvement estimates. Following two methods employed by other papers, they used a matching procedure, in which benchmark companies were picked based on various pre-acquisition components. The results suggest that the M&As had a moderate, yet significant, effect on firm performance.4 Whilst using the second matching procedure, which examines the consolidated financials, the results reported larger improvements after the takeover in operating performance.5 Hence, both the target firms’ performance increased as well as the combination of target and acquirer. In addition, the method of payment was found to have an insignificant impact on post-acquisition performance.6
Rahman & Limmack (2004) used a sample of Malaysian firms that performed M&As over the period 1988 until 1992 to investigate post financial performance. The bulk of the target firms were privately-held businesses. The results indicate that the acquisitions that
4 The median increase in post-takeover performance for firms ranged from 0.13% per annum to a statistically
significant 1.78% per annum.
5 The second method followed the procedure by Healy et al. (1992). The results revealed improvements in
performance, ranging from 0.80% to a statistically significant 3.1%.
6 The are several ways to acquire a firm, which refers to the method of payment. Acquiring firms can acquire
involve Malaysian firms induce improvements in operating cash flow performance. These improvements in performance resulted from an increase in return on assets and in asset turnover. Thereby, both aforementioned improvements were not realized at the expense of the viability regarding the combination of the firms, while an increase of the capital investments followed additionally. Furthermore, their research also concluded that acquiring firms who did not instantly change the target firms’ management team the post-acquisition performance realized a greater increase.
Balsvik and Haller (2010) investigate target firms’ productivity changes following the acquisition. The sample consists of Norwegian manufacturing plants over the period from 1992 to 2004. In total, 7.158 plants were examined on their performance changes, as measured by their TFP, employment and wages.7 The results implied that foreign acquirers tend to target relatively well producing plants, while domestic acquirers target plants which exhibit relatively low productivity prior to the acquisition. Moreover, domestic M&As did not increase the productivity of the target firms after the acquisition, while foreign M&As significantly increased the productivity. Based on their findings one can argue that the deals are driven by different motives. Domestic acquirers seemingly pursued competitive or comparative advantages, while foreign acquirers sought synergy gains.
Healy et al. (1992) examined the 50 largest United-States mergers between 1979 through 1984 on their post-acquisition performance. In this research they estimate acquisition-persuaded increases in cash flow performance as the intercept of the regression of post-acquisition cash flows, which are industry-adjusted, of merging companies on the matching pre-acquisition statistic. Moreover, industry-median firms were used as a benchmark to examine post-acquisition target firm performance. With use of the latter the authors concluded that cash flow performance improved post-acquisition. This improvement is significantly greater for firms with overlapping businesses, which indicate that the synergies were well exploited.
However, several papers failed to reveal an effect in target firm’s performance post the M&A. Many papers examined companies’ performance with single measures, while others included several common measurements. Henceforth includes papers that failed to
7 Total Factor Productivity (TFP), is a measure that is commonly used to evaluate production plants’ performance.
find significant post-performance changes, among which are papers with several measurements in order to amplify their findings.
Pervan et al. (2015) conducted research on company performance in Croatia. Croatian target firms were exclusively analyzed that were acquired between 2008 to 2011, whereas their sample consisted of 116 firms. They assumed, similar to the bulk of previous literature, that firms can realize and accomplish economies of scale to reduce operating costs by merging with another firm. The variables used in the paper were total expenditures, return on assets, return on equity, and lastly profit margin. Their obtained results evidently indicated statistically insignificant differences in target firms’ performances prior to and post-M&A. Also, statistically insignificant differences were found even when performance of target firms, after the acquisitions, were compared to peer companies. Decisively, despite the increasing domination of foreign investors in the Croatian economy the results indicated that the majority of the M&As were performed by Croatian companies. Furthermore, Rashid and Naeem (2017) examined the impact of M&As on financial performance in Pakistan using data on the deals that occurred between 1995 until 2012. The sample consisted of acquired firms that were non-financial firms. The ratios included in their paper were return on assets, profit margin, debt to equity ratio, interest coverage ratio, current ratio, and quick ratio. The results indicate that the M&As do not have any significant impact on the aforementioned ratios on all but one. Interestingly, the estimates indicate that the acquisitions have a negative and statistically significant impact on the quick ratio of the target firm. The latter can be explained by the merger of the assets at parents’ level, while this has a major impact on the quick ratio.8 Yet, the current ratioshould have had similar noticeable significant results subsequently.9 A significant increase in inventories at subsidiary level after the takeover could be arguable, while the inventories are too often overlooked in both the literature as well as in the big picture of the deal itself (Sagner, 2012).
Ghosh (2001) conducted research on operating firm performance following an acquisition using firms matched on performance and size as benchmark. The sample consists of the hundred largest acquisitions that occurred per year during the period 1981
8 The quick ratio, which is also called the acid-test ratio, is calculated by deducting the inventories from the
current assets and subsequently dividing the remainder by the current liabilities. When the parent incorporates the current assets of the target firm, the quick ratio deteriorates.
till 1995. To be more precise, the final sample totaled 315 pairs of target and acquiring firms. The results implied that operating performance did not improve after the acquisitions. In addition, the author also analyzed whether there is a difference in method of payment on the performance. These results indicated that cash flows increased significantly when cash was used as a method of payment, while a decline was seen following a stock acquisition. Interestingly, the aforementioned method used by Healy et al. (1992) was used as a robustness check. The results contradicted the findings by the method used by Ghosh (2001), while suddenly evidence was found arguing that operating cash flow performance increased post-acquisition. Therefore, different benchmarks occasionally yield different results, which consequently causes papers to contradict on post-performance changes and therefore lack consensus.
In conclusion, there are numerous papers available concerning M&A post-performance measured by accounting post-performance indicators, yet many papers contradict with each other. These contradictions exist due to the fact that there is no universal design in measuring the post-acquisition performance of (target) firms (Meglio and Risberg, 2011). Several papers included commonly used performance measures, which is mainly ROA, whereas other papers used less pronounced measures. In addition, the benchmark used to examine pre- and post-acquisition performance also differs greatly among the cited papers and the literature as a whole. Interestingly, many papers are seemingly mysterious with their results when papers are critically examined, while fixed effects and standard error clustering inclusion are oftentimes not mentioned when clarification is necessary. Clustering for instance is essential in such research, while the variables that provide the same kind of information apply to the same group. Including the latter assesses collinearity and redundancy and when excluded, coefficients could be unjustifiably tested significant. In this manner, endogeneity concerns are not addressed. Thus, clustering at firm level is necessary due to the fact that observations of a given firm are not independent over time. The latter greatly impacts the results, and therefore some papers in current literature could potentially have author’s bias. This makes it even harder to reach consensus and to be able to generalize findings.
2.3 Merger & Acquisition cross-border
The surge of cross-border M&As was one of the most compelling characteristic of the last M&A wave, and the main motivation behind it is the same as for domestic deals. Moreover, the combination of the firms should exceed the worth of the firms as separate entities (Erel et al., 2014). The cross-border M&As can be categorized as horizontal, which refers to the combination of competing firms in the same industry, vertical, which is the combination of firms having a client-supplier relation, or conglomerate, which is the combination of firms that engage in different activities.
Bertrand and Zitouna (2004) investigated the repercussion of acquisitions on target firms’ performance, which was conducted on French manufacturing firm-level data over the period from 1993 until 2001. With the use of a difference-in-difference analyses and by looking at TFP, they find that French firms did not benefit from the M&A with respect to the profitability. However, the TFP did increase, which proposes that the firms reorganize in order to maximize their efficiency at upstream and downstream level. These findings are in line with Piscitello and Rabbiosi (2003) which found that foreign acquisitions improved the labor productivity of Italian target companies, whereas Gioia and Thomsen (2004) found contradictory results on the Danish market. The latter also found that cross-border M&A experienced a lower performance than domestic M&A. In contrast, Bertrand and Zitouna (2004) found that cross-border deals outperform domestic deals regarding the efficiency gains. On the other hand, only the domestic deals revealed an increase in profitability of target firms. Their finding could be substantiated accordingly, while it is most likely that the acquiring firms acquired the target firms to gain market power (Bertrand and Zitouna, 2004).
Stiebale and Trax (2011) provided empirical evidence on cross-border M&As on acquiring firms’ performance over the period 2000 until 2007 in the United Kingdom and France. With the use of a matching procedure and a difference-in-difference analyses they found that the cross-border M&As increased domestic investments and sales. Furthermore, domestic productivity improved for companies that actively operate in knowledge-intensive industries. The authors conclude in their research that the results suggest a relation between the motives for cross-border M&As and their post-effects, while some heterogeneity was found across industries and types of acquisitions.
Geluebcke (2015) investigated target firms in Germany, in which the research provides evidence of cross-border M&A effects on their performance. The study is confined to manufacturing firms due to the fact that a high-quality panel data was provided by German official statistics. Furthermore, the author conducted the research over the period from 2007 to 2009, while using a difference-in-difference estimator and a propensity score matching approach. The results contradict with former research that has been conducted in Germany, while Geluebcke (2015) finds a negative effect of foreign M&As on employment and no performance improvements were seen.
Bortoluzzo et al. (2014) used the Brazilian market to examine whether the cross-border M&As had improved Brazilian firms’ financial performance during the period from 1994 till 2008. The performance measures used were return on assets and return on invested capital, while they also controlled for cultural distances between the particular countries.10 The obtained results indicate that the cross-border M&As by Brazilian firms indeed improve their financial performance. To be more precise, the performance favors M&As in which the cultural distance between the countries of acquiring firm and target firm is low and when the acquiring firm is developed in institutional context. Interestingly, the authors also found that acquirers’ M&A experience should be included as a control variable, while the results revealed that there is an inverted-U shape relationship11 between acquirer firm previous M&A experience and the performance of the new cross-border acquisition.
Lastly, Gugler et al. (2003) investigated the effects of mergers around the world by comparing the performance of the acquired firms with control groups of non-acquired firms. Sales and profitability were examined as main financial variables. Different countries and continents were analyzed separately and grouped in the following way: USA, UK, Continental Europe, Japan, Australia/New-Zealand/Canada, and the rest of the world. The results indicate that on average profits increase significantly, while sales decrease. This pattern is steadily observable throughout the aforementioned groups. In addition, no compelling differences were found between domestic and cross-border deals. More precisely, the authors identified acquisitions that increased profits by increasing efficiency. The latter is most likely to be true for relatively small firms.
10 The proxy for cultural distances is based on Hofstede’s cultural dimensions theory.
11 Such a relationship is explained as a quadratic relationship, which seeks to reveal a causal relation between
3. Hypotheses
In previous section various papers were explained with respect to the motives of an M&A, target firm post-acquisition performance and international M&As. This section defines the hypotheses based on the overall conclusions of the preceding papers, while providing the papers own view, and subsequently suggesting the expectations on the results that will be accessed in section 6.
First, as mentioned before, current literature lacks consensus regarding the targets post-performance changes. Numerous variables have been included for examination and different models were used that tend to support the phenomenon that acquired firm performance improved after the M&A (Powell and Stark, 2005; Erel et al., 2014; Rahman and Limmack, 2004; Balsvik and Haller, 2010; Healy et al., 1992; Gioia, 2005). Also, due to the fact that the synergy motive is the most prevailing motive for an M&A, which supports the increase in performance speculation, this study follows the aforementioned papers. Different performance measures are included to be able to obtain a clear conclusion, while there are also many papers that fail to find evidence for performance changes (Pervan et al., 2015; Rashid and Naeem, 2017; Ghosh, 2001). In general, M&As provide the target firms the opportunity to reorganize their operations to be able to fully utilize the economies of scale and scope for production, financing and distribution. Also, bargaining power improves, which lead to a further reduction in costs, and additionally there are more opportunities for diversification (Andrade et al., 2001). Based on the presented theories and the overall thought that target firms obtain the synergies, among which are cost synergies and revenue synergies, from the parent the first hypothesis is formed, in which this paper expects to find that performance does increase on average:
H1: Target firm performance increases after the acquisition.
Second, Piscitello and Rabbiosi (2003) found that cross-border M&As improved the performance of Italian target companies, which is in line with the overall findings of Betrand and Zitouna (2014) and Stiebale and Trax (2011). Yet, Gioia and Thomsen (2004) failed to find evidence examining the Danish market, while cross-border M&As experienced a lower performance than domestic M&A. Further, Geluebcke (2015), which investigated the German market, concluded that there are no improvements in performance of the foreign
acquisitions. Also, Gugler et al. (2003) differentiated the effects of domestic M&A from those of cross-border M&A, but also failed to find important differences. Aggregate European target firm post-acquisition performance is scarce as aforementioned, and in current literature there has not been any consensus regarding the cross-border versus domestic M&A differences. This paper expects cross-border M&As to outperform domestic M&As, while foreign firms tend to select target firms on the basis of their superior performance prior to the acquisition (Conyon et al., 2002). The latter is in line with Balsvik and Haller (2010), which stated and found that generally cross-border M&As reveal greater improvements in performance than domestic M&As. In addition, the surge in cross-border acquisitions is a key feature of the last merger wave, which is also seen as a way to innovate both acquiring firm as well as the target firm (Stiebale, 2016). Also, cross-border M&As provide access on foreign markets and it is a way to restructure the industry (Betrand and Zitouna, 2014). Besides, exclusive goods can be marketed in different markets, technology can be transferred to these new markets, market inefficiencies can be exploited, unfavorable governmental policies of the home country can be avoided, and lastly increased local support to international clients are several important reasons to undergo an international expansion. Overall, the cross-border versus the domestic deal post-acquisition performance is unquestionably ambiguous as former research indicates. In general, the papers that conducted research on the latter within a single country did not find any significance, whereas more aggregate research did obtain noteworthy results. Due to the fact that this study includes an aggregate research on European firms, and due to the economic reasons behind the international acquisitions stated previously, the second hypothesis is formed. This paper expects to find that cross-border deals are more beneficial for target firms than for target firms in domestic deals.
H2: Cross-border M&As outperform domestic deals post the acquisition.
Third, another main thought on M&As is that, in comparison with small and medium sized enterprise acquisitions, large targets are able to obtain greater operating performance
post-acquisition due to the sizeable synergies, economies of scale and the financial synergies.12 On the other hand, acquiring a large firm could also lead to a decline in performance, while incorporating such a firm takes much time, more effort, and more chances of cultural clashes. The latter is most likely due to the fact that large firms tend to be operational for a longer period than small firms and therefore have a more deep-rooted firm culture. Moreover, the acquiring firm could face many difficulties during the integration process. The papers by Switzer (1996) and Linn and Switzer (2001) support the main thought of the synergy benefits among large firms, while their findings show that large targets outperform small targets. In line with previously mentioned papers, McGucking and Nguyen (1995) and Gioia (2005) both obtain significant results when target size is included. They explain this variation by motivating that larger firms are expected to be sold than shut down when they underperform. Powell and Stark (2005) and Healy et al. (1992), however, fail to find evidence for the latter. In addition, Sinani and Meyer (2004) stress that SME targeted firms are more flexible and therefore they expect that, in comparison with large firms, these firms will gain more from the acquisition. In general, SMEs tend to be acquired for efficiency motives and rapid growth opportunities, whereas large companies tend to be acquired for both the market power motive and managerial motive. It is common for the second and third largest firms in an industry to combine their resources in order to become market leader. There are several advantageous for a market leader, among which are financing -e.g., more potential investors, leverage firm’s reputation in advertising campaigns, improved distribution opportunities, and better qualified personnel candidates. On the other hand, while large enterprises tend to be acquired for market power gains, and SME firm’s other motives, it is expected that for SME firms and not for large firms a change in performance is observable. Hence, this study formulates the following hypothesis, in which this paper expects that SME acquired firms show a greater improvement in performance than acquired large enterprises:
H3: SME targets exhibit greater performance improvement than large enterprise targets after the acquisition.
12 SMEs are according to the European Commission standards firms that have either less than 250 employees
or less than 50 million EUR turnover. In contrast, large firms are defined as firms having more than 250 employees and more than 50 million EUR turnover.
Lastly, cultural distances are important when investigating cross-border deals as firms that acquire over the border are at the same time embedded in various and diverse social contexts. The latter affects the overall strategies and the institution itself, while also creating challenges and opportunities which need to be correctly managed (Westney and Zaheer, 2009). The ‘distance’ phenomenon has been included in several papers, and has been found to affect the performance, entry mode, choice of location, and uniformity of procedures (Tihanyi et al., 2005). To be more precise, as the cultural distance rises between firms, organizational styles and methods are most likely to differ significantly, consequently bearing conflicts between the resources (Morosine et al., 1998). Hagendorff and Voss (2010) stress that implementation complications after an acquisition bearing the cultural distance in mind can ultimately harm the information transaction process and synergies. Therefore, the aforementioned authors emphasize that a low level of cultural distance among merging firms certainly positively affect the to be shared knowledge and resources due to the fact that the employees and management share the same values. In contrast, firms with a high level of cultural disparity transaction costs are most likely to impede the efficient transfer of proficiency.13 In line with the presented papers, this study builds forth on the belief that low levels of cultural distance are advantageous to the M&A performance, whereas a medium or high level of discrepancy negatively affects the performance. In addition, acquiring far distant firms tend to involve conglomerates, firms that diversify their risk, and firms that acquirer targets for integration purposes. The latter entails a vertical M&A, in which the acquirers aim to improve its supply chain management. Moreover, acquiring firms integrate the target firms for efficiency reasons which subsequently decreases its operational dependency on other firms. However, in this manner, it is most likely that acquiring firm’s performance increases and not the target firm’s performance. Moreover, this study proposes the following hypothesis:
H4: M&As represented by low levels of cultural distance result in greater financial performance than M&As represented by medium or high levels of cultural distance.
13 Low level of cultural distance between two countries is denoted by a total of 0 - 20% difference, medium levels of cultural distance in the 20 - 40% range and a large discrepancy by more than 40%. Country CDI scores can be found in the appendix.
4. Methodology
This section presents the methodology that will be used in the results section. First, the different performance measures will be explained. Second, the controls and the rationale elicited. Third, the peculiar benchmarks amplified in order to be able to analyze the effects of the M&As. Variable definitions are described in the Appendix.
4.1 Performance measures
As proposed by previous literature and in line with Meglio and Risberg (2010), this paper will include a widespread of performance measures to fully capture the post M&A performance changes. As aforementioned, this research focuses on accounting performance measures rather than market performance, due to the fact privately held firm’s examinations are less pronounced in the existing literature. To be more precise, there is no universal design to measure the performance of the acquisition on target firms’ financial performance. Meglio and Risberg (2010) illustrated three different categories with the most commonly used variables to measure accounting performance: 1) Profitability, 2) Growth and 3) Leverage, Liquidity and Cash flow.14
In order to measure the profitability of the target firm post the acquisition, this study will include ‘Return on Assets’ (henceforth ROA), ‘Return on Sales’ (henceforth ROS), and ‘Net Income’. Bruner (2002) argues that the ROA measure is widely used by both researchers as well as investors due to its validity. In addition, the ROA is promoted as an incidental instrument to capture the economic value. The ROS variable reveals how much profit is composed per euro of sales. An improvement would demonstrate that the target firm is growing more efficient. In contrast, a deterioration could signal impending financial concerns. Lastly, Net Income reveals the firm's earnings or profit. A growth in Net Income post-acquisition could indicate two important causal-effects. First, sales increase due to the fact that the synergies obtained from the merger are well exploited and more consumers are reached while both customer-bases will be combined. Second, costs deterioration could follow the merger, while the synergies obtained reduce costs due to the economies of scale and cost sharing possibilities between parent and target firm. Even though Return on Investment (ROI) is also commonly used, the Amadeus database, which will be further
explained in section 5, does not provide any information on the amount of investments by the acquirer nor the target.15
The second category will be measured by the growth in Sales, particularly due to the fact that this measure is the most commonly used and often uttered in the same breath as the phenomenon growth. A growth in sales could be the result of various firm improvements. In general, the main firm-improvements causing the increase in Sales is that the synergies reduce the operational costs, increase the firm's production capacity, and enhance overall efficiency.
The last category elicited by Meglio and Risberg (2011) include ‘Leverage’ and ‘Cash flow’. As aforementioned, Erel et al. (2014) conducted research on target firm financial constraints, with in particular whether the acquisition relieve these constraints. In their paper, they examined leverage and cash flow, while also using a European aggregate target firm sample. For this reason, this study excludes these dimension indicators as dependent variables. However, leverage could have an effect on the motive to actively perform an M&A due to the constraints. Thus, leverage is added as a control variable which will be elaborated on in the next subsection.
The variables explained throughout this subsection are all directly affected by M&A activities, which eventually aid the overall conclusion on accounting post-performance changes and subsequently could lead to generalizability. Accounting based performance measures are affected through multiple ways, either due to management and operational improvements or through appropriate distribution of the firm’s resources (Zollo and Meier, 2008).
4.2 Control variables
The control variables are variables that are held constant in order to assess the relationship between the aforementioned performance measures and the key variables of interest. The latter refers to the binary variable After in the OLS method and the interaction term in the difference-in-difference method, while these variables will argue if the M&A affected the
15 Several papers provide an approach for the construction. A gross investment variable could be constructed,
however the variable would lack consistency, while too much data is missing. Therefore, this paper does not include such a variable.
financial performance of the target firms. To be more precise, the control variables will be added to control for time-invariant firm characteristics that are omitted in the regression.
Employees is the first firm characteristic variable. McGucking and Nguyen (1995)
stress that including the variable supports to control for the effects of firm size on ownership transition. In this manner, the firm’s composition is held constant over time, which helps to find evidence or support for the hypotheses in the dependent variable itself. When the number of employees increases significantly, costs tend to increase, however productivity also most likely increases significantly –e.g., roa, ros, net income, and sales- could all be affected. The latter would weaken the evidence that is found in the change in the performance measures. More precisely, potential evidence for the employed hypotheses could be overlooked if the number of employees is not controlled for.
Size is the second firm characteristic variable. This measure is commonly used in
literature, while relatively large firms are most likely to actively undertake M&A activities and small firms tend to be acquired sooner. Hence, the variable controls for differences in firm capacity. Also, the variable is used as a proxy for the firm’s access to competitive capital, while assets can be used as collateral in order to receive (additional) loans. As with employees, this control variable is heavily skewed, hence for both variables the logarithmic transformation is included which is more approximately normal. In sum, including this variable will reduce the effects of confounding differences between target firms, which helps to find more evidence or support for the hypotheses in the dependent variables itself.
Leverage is the third firm characteristic variable. Angelopoulou and Gibson (2007)
stress that firms with low leverage tend to be less financial constrained than firms with a high leverage. In addition, Guariglia (1999) found that firms with a high leverage ratio have a higher default risk, which results in a reduction in investments exerted. Moreover, these firms had to use external funding to be able to do an investment, consequently increasing their costs even further. Thus, this variable will be added as a control, while it is most likely that financially constrained firms undergo an M&A more promptly than unconstrained firms. In this matter, the variable helps to control for target firms seeking an M&A for financial constraints reasons. The latter is important, while the overall performance of financially constrained firms is most likely to improve drastically. Thus, when this variable is not controlled for, the obtained results for the different hypotheses could be biased towards performance improvements.
Cultural Distance Index (CDI) will also be included to control for country and regional
differences between firms, whereas a variation of the variable will also be used for the fourth hypothesis. This variable is necessary, while non-European countries do not have their accounting financials available on the Amadeus database. Among Hofstede’s index variables are: Individualism (IDV), Power to Distance (PDI), Uncertainty Avoidance (UAI), Masculinity (MAS) and long-term orientation (LTO).16 Aybar et al. (2009), provided the guidance for the CDI variable development. The construction of the variable will be briefly explained henceforth. Every aforementioned indices represents a difference between two countries. Thus, for each deal i, five cultural distance measurements are computed, each representing a different dimension j.17 Then, the cultural distance (CD) variable can be constructed, which is the absolute difference in dimension score between the target and acquirer. The latter is facilitated by:
𝐶𝐷𝑖𝑗 = |𝐷𝑗,𝑎𝑐𝑞𝑢𝑖𝑟𝑒𝑟− 𝐷𝑗,𝑡𝑎𝑟𝑔𝑒𝑡| [1]
where, 𝐷𝑗 denotes the score of the various cultural dimensions for each completed deal i. Following this procedure, the cultural distance index can be constructed that takes all the five dimensions into account. Moreover, this variable is a combination of the different cultural dimensions. The latter is constructed in the following way:
𝐶𝐷𝐼𝑖 = 𝑁11𝐽∑𝐽𝑗=1𝑅𝑎𝑛𝑘𝑗(𝐶𝐷𝑖𝑗) [2]
where, the term 𝑅𝑎𝑛𝑘𝑗(𝐶𝐷𝑖𝑗) is a build in rank function18 that appoints a certain rank for each observation in the sample, starting from the observation that is the least different to the most different. The j refers to the number of dimension measures, while the term 𝐶𝐷𝑖𝑗 refers to the 𝑗𝑡ℎ measure of the cultural distance for each deal i in the sample. The term 1𝐽 averages the ranks relative to the number of different cultural distance variables that
16 The indices are retrieved from: https://www.hofstede-insights.com/product/compare-countries/
17 Each deal is denoted by i, thus i = 1,..., N, were N = 2375 in this paper. In addition, j refers to the dimensions
as described by Hofstede. Each dimension (IDV, PDI, UIA, MAS, and LTO) takes values from 1 to 5.
are accessible for each country.19 In this research, j is equal to five, while five measures are included. Lastly, the term 𝑁1 is a scaling quota so that the CDI variable takes values ranging from 0 (least different) to 1 (most different). To be more precise, a CDI score close to 0 indicates low cultural distance between two firms, whereas a CDI score close to 1 entails a high cultural distance. For domestic deals, the variable will take the value of 0 due to the fact that there is no cultural distance between firms that are stationed in the same country. Thus, this variable helps to control for regional differences between firms assuming intra-country spatial and corporate homogeneity.
When including Firm fixed effects for other omitted variable bias variables such as
Age and Takeover Experience will be omitted due to this fixed effect inclusion. Country fixed
effects and Year fixed effects will also be added to control for other omitted variable bias. Also, variables such as Deal Value, Deal Financing, and Method of Payment are excluded as controls when applicable, while the bulk of the deals do not entail such information.
4.3 Benchmark methods
As aforementioned, nearly all papers in existing literature use a single method to conduct research on financial performance changes post the M&A. The results are therefore quite hard to generalize, which is one of the reasons why current literature lacks consensus. Moreover, these obtained results could be greatly biased towards the overall preferences of the authors. Ghosh (2001) confirmed the latter in his paper in which he failed to find evidence of effects on firm performance, while obtaining positive results using the method described by Healy et al. (1992). Furthermore, solely investigating the differences in pre- and post-acquisition target performance, using itself as a benchmark, is bound to have significant biases. Among the concerns are that it is impossible to conclude the motives of the M&A and this method overlooks industry influences (Thanos and Papadakis, 2012). Using peers as benchmark reveals what would have happened if the target firm would not have been acquired. Only then, a clear conclusion could be made regarding the post-effects of the M&A. In upcoming sub-sections, the benchmarks included in this research will be briefly described.
19 For the countries: Bermuda, Gibraltar, and Virgin Islands no cultural distance dimensions were available.
4.3.1 OLS model
It is widely argued that papers that only compare pre- and post-acquisition performance of the target firm itself contain significant bias. As aforementioned, this method is not a well-suited approach to be able to make clear cut conclusion on the effects of the M&A. There are many major potential issues not taken into account. Moreover, the obtained results fail to fully control for acquirer firm size, performance prior the acquisition and their acquisition motives. For comparison purposes this study includes the simple Ordinary Least Squares (OLS) regression including the control variables and fixed effects explained in section 4.2. The following regression will be conducted on the different performance measures:
𝑌𝑖𝑡 = 𝛽0+ 𝛽1 𝐴𝑓𝑡𝑒𝑟𝑡+ 𝛽2 𝑆𝑖𝑧𝑒𝑖𝑡+ 𝛽3 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠𝑗𝑡+ 𝛽4 𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒𝑙𝑡+ 𝛽4𝐶𝐷𝐼𝑠𝑡+ 𝛽5𝑋𝑢𝑡+ 𝛾𝑓+ 𝛾𝑐 + 𝛾𝑦 + 𝜀𝑖𝑗𝑙𝑠𝑢𝑓𝑐𝑦 [3]
where, 𝑌𝑖𝑡 represents the different performance measures as described in section 4.1. The main coefficient of interest is denoted by 𝛽1, while this term will evaluate if there is a positive, negative, or no change in pre- and post-acquisition performance. The latter is only possible if the After term is tested significant, otherwise no conclusion could be derived from the coefficient regarding the potential positive, negative, or neutral effect. Fixed effects will be included to account for other omitted variable bias, while a panel data set is used. More precisely, depending on the regression, Firm fixed effects, Year fixed effects, and Country fixed effects will be included. Additionally, dummy variables presented in the regression as 𝑋𝑠𝑡 will be added to the regression in order to examine the different hypotheses presented in section 3.
4.3.2 Change model
The second benchmark will follow the methodology by Powell and Stark (2005). In their paper they update the method exploited by Ghosh (2001) and Healy et al. (1992), while they overcome potential bias by controlling for acquirer performance prior to the M&A. Also, Powell and Stark (2005) employ a more suited model, also known as the change model, to compare the results of both benchmarks. Healy et al. (1992) measured performance changes relative to an industry benchmark, which means that the measure of performance is industry adjusted. Powell and Stark (2005) stress that such an approach is biased since the
industry reference fails to control for acquiring firms’ size and performance prior to the acquisition, thus the results tend to be in favor of finding significant improvements. In essence, if the acquirer’s superior pre-performance is expected to be long-lasting, then this pre-performance need be controlled for to obtain unbiased financial performance results. Yet, if this superior pre-performance is transitory the decline in performance needs to be included in the pre-performance benchmark. Further, whilst using a regression model the potential bias is most likely to be greater, while (non) random errors could influence the intercept due to the prior performance between the industry and the acquirers. In line with Ghosh (2001), the authors utilize benchmarks that control for prior operating performance, size, and for industry. Moreover, firms will be matched with other firms from the same industry based on their size and performance. The authors used cash flows as pre-performance, while this study includes the measures as described in section 4.1. The aforementioned papers incorporated throughout this subsection examined acquiring firms, while this study focuses on target firms. Further, a decline in performance over time is assumed to be a feature of the matched firm (Powell and Stark, 2005).
The benchmarking procedure exploited is in line with Powell and Stark (2005), Ghosh (2001), and Loughran and Ritter (1997). To be more precise, matched firms are selected from target and acquirer industries.20 On the basis of a company size filter of between 25% and 200% of the target and acquirer size the firms are matched measured from a year prior to the acquisition. To be sure, if this filter does not satisfy, meaning that not all firms have enough potential firms, the filter specification is extended to a 0% and 300% range. From the potential matched firm list obtained by conducting the former method, the firms with the closest performance a year prior to the acquisition of the target is chosen as the benchmark.21
4.3.3 Difference-in-Difference model
The third method follows the paper of Bertrand and Zitouna (2004), in which they use difference-in-difference (Henceforth DD) evaluation approaches with use of a propensity score matching procedure. By doing so, the question referring to what would have
20 The NACE Rev.2, primary code(s) are used, while this classification structure is more commonly used for
European research due to the fact the codes are assigned by the European Union.
happened to the target firm’s performance could be answered. The announced approach sheds light on the average effect of a treatment, which is the acquisition itself, on the treated group (acquired firms, henceforth AF). To be more precise, the DD approach examines the differences in outcomes prior to and post the acquisition of AF relative to the outcomes of the control group (unacquired firms, henceforth NAF) prior to and post the acquisition. Following this method, a clear conclusion can be made regarding the effects of the M&A on target firms.
𝐸(𝑌𝑖𝑡0/𝐴𝐹 = 1, 𝑡 = 1) − 𝐸(𝑌
𝑖𝑡0/𝐴𝐹 = 1, 𝑡 = 0) = 𝐸(𝑌𝑖𝑡0/𝐴𝐹 = 0, 𝑡 = 1) [4] − 𝐸(𝑌𝑖𝑡0/ 𝐴𝐹 = 0, 𝑡 = 0)
In this model 𝑌𝑖𝑡1 will incorporate the result of a target firm that has been exposed to an acquisition in period t. In contrast, 𝑌𝑖𝑡0 will incorporate the result of a target firm that had not been exposed the acquisition. Moreover, the effect of the M&A for the particular firm, as indicated by i, is then measured by 𝑌𝑖𝑡1 - 𝑌𝑖𝑡0. Consequently, the average shock could then be depict, which is illustrated as 𝐸(𝑌𝑖𝑡0/𝐴𝐹 = 1). Not unimportantly, the two groups, referring to the control group and the treated group, are presumed to be afflicted similarly by macroeconomic shocks (Bertrand and Zitouna, 2004). The model proposed by Bertrand and Zitouna (2004) is expressed in the following way:
𝑌𝑖𝑡 = 𝛽0 + 𝛽1𝐴𝐹𝑖+ 𝛽2𝐴𝑓𝑡𝑒𝑟𝑡+ 𝛽3𝐴𝐹𝑖 ∗ 𝐴𝑓𝑡𝑒𝑟𝑡+ 𝜀𝑖𝑡 [5]
where, the 𝐴𝑓𝑡𝑒𝑟𝑡 variable is again a binary variable that takes the value of 1 if the target firms have been acquired and 0 if they have not been acquired. The latter controls for time effects on the dependent variable, which is illustrated as 𝑌𝑖𝑡. Further, the 𝐴𝐹𝑖 variable takes the value of 1 for target firms and 0 if the firms were no targets. The interaction term, shown as 𝐴𝐹𝑖 ∗ 𝐴𝑓𝑡𝑒𝑟𝑡, is taken into account and thus letting the model incorporate differences between the AF with respect to post-acquisition effects on financial performance. The DD estimator is indicated as 𝛽3, while this term measures the impact of the M&A on the AF group. The aforementioned model is expanded to be able to include firm characteristics. The additional independent variables control for variation in observable
