The impact of acquisitions on acquiring company’s operating performance : evidence from US public firms in 2016

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The Impact of Acquisitions on Acquiring Company’s Operating Performance: Evidence from US Public Firms in 2016

Yitian Xiao 10823387

Supervisor: Rafael Matta

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Statement of Originality

This document is written by Yitian Xiao 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.

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Abstract:

The business trend shows that successful companies are acquisitive and enjoying vast profits. It is questionable whether acquisition transactions are advantageous for acquiring firm’s operating performance when isolating the event effect. This research has found recent evidence from US public firms that reached one million operating revenue to test the relationship between acquiring firm’s operating performance and the presence of acquisition deals. The evidence provided by this research shows that the presence of acquisitions had no significant influence on firm’s operating revenue in 2016. The research result is consistent with the study of Ghosh (2001). The possible explanations could be acquisition synergy cannot contribute to acquiring firm’s current revenue or the acquisitions on average are not value enhancing. However, it is also possible that current year acquisitions will have significant long-run impact on acquiring firm’s operating performance. One-year base data is considered difficult to capture the true impact. Further research is needed to shed more light on this occurrence.  

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1. Introduction

The most successful technology firms have achieved massive scale in just a couple of decades. Apple, Google, Amazon and their peers once again dominate today’s economy just as US steel, Stand Oil and Sears dominated the economy in 1930s. The small number of giant companies are merging with each other to get even bigger and enjoying vast profits (The Rise of the Superstars, 2016) . As might be expected, takeover activity can be one of the prominent strategies for acquiring firm to improve profitability. But what precisely is the takeover effect on acquirer’s operating performance? Is the beneficial effect of acquisition large or small? It is also possible that actually acquisition has negative or no effect on acquirer’s operating performance if other profitability-related factors controlled as constant.

Before answering these questions, there is an endogenous concern in conducting research on the relationship between the occurrence of acquisition and acquiring firm’s operating performance. The existence of correlation may misleadingly suggest that acquisition event is the causal effect of improvements in acquirer’s operating performance or the other way around. For example, it is likely that high value firms are more acquisitive than low value firms because they are more able to invest energy in finding and incorporating acquisitions. The reverse causation can produce misleading conclusions when interpreting correlations in regression-based analysis. In addition, outside factors could also explain why the empirical evidence shows that high revenue and acquisitions events happening together within th same firm. If the outside factors are the driving force behind two variables which make them change together, controlling the presence of acquisition will have no effect on the change of firm’s operating performance. Therefore, to explain the causality effect of acquisitions, this research has reviewed previous literature on the channels through which an acquisition deal can influence the acquiring firm’s operating performance and review on the motives for a firm to become an acquirer. In addition, the research acknowledge the limitations of using regression-based methodology and discuss the factors that biase results downwards.

The objective of this research is to find up-to-date evidence from US publicly listed firms to test the relationship between acquiring firm’s operating performance and the presence of acquisition deals. Basically, my research design is formulated by following the previous studies that investigating the impact of M&As and studies that discussing the driving force of being an acquirer. According to the study of Ghosh (2001), the operating performance of

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acquiring firm did not improve following acquisitions. I want to further investigate whether the presence of acquisition actually has no significant influence on firm’s operating performance, if not, why some firms that used acquisitions could achieve higher revernue growth rate than those did not . 1

This research is of theoretical and practical interest for three reasons: 1) this research provides evidence on operating performance implications of takeovers in acquiring firms in various US industries. 2) This research paper has summarized factors that previous studies found that are determinant to the probability of acquisitions. 3) The findings may help entrepreneurs and investors in bidder companies reevaluate their strategies for realizing revenue growth through M&As. Therefore, the basic research question is in US manufacture, utilities, information and other industries, whether the presence of acquisition activity has influence on the firm’s operating performance.

The rest of paper is structured as follows. Section 2 presents a discussion of the related literature, the impact of M&As, the channel through which takeovers may affect the firm’s performance, the determents of acquisitions. Section 3 demonstrate the hypothesis and its theory base. Section 4 describes the theoretical framework that used to analyze the relationship between operating performance and other variables. Section 5 &6 describes data and methodology use for the regression analysis. In section 7 &8, the regression results are presented with thorough discussion on explanations. The limitations of previous studies and this report are also elaborated. Finally, the conclusion will be drawn with suggestions on further investigation.

2. Literature review

2.1 Impact of M&As

A finance theory points out that increasing shareholder wealth is the firm’s primary objective. In most literature, analyzing short-term shareholder wealth effect constitutes the dominant

McKincey’s recent research finds that software and online services companies conducting one totwo deals a

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year enjoyed higher revenue growth than those doing no deals; those undertaking two or more deals averaged significantly higher revenue growth (Dinneen, Kutcher, Mahdavian, & Sprague, 2015).

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approach to evaluate the impact of acquisitions. Most of the papers use abnormal returns to 2 measure the value creation potential from acquisition transactions. However, the announcement of a takeover affects the normalized stock price of target and acquirer in different ways. For shareholders in target firms, they often experience substantial positive abnormal return (Martynova & Renneboog, 2008). While for the acquiring firms' shareholders, they are not as fortunate as target firms' shareholders; the results are less uniform. As the paper written by Kohers & Kohers (2000)reveals, high-tech related takeovers can provide greater benefits to acquiring firm’s shareholder wealth. In their study, the acquirers of high-tech targets experienced significantly positive stock returns on the announcement day and the bidders’ stock returns showed positive correlation with acquiring young and privately held companies (Kohers & Kohers, 2000). Kohers & Kohers (2000) argue that the high-growth nature of high tech industry which depends on emerging technologies makes the corresponding market performance outperform.

However, for other literature in analyzing acquiring firm’s wealth effect, the most common finding is that the shareholders of acquiring firm experience no significant positive or negative abnormal returns. Acquirers neither gain nor lose from acquisitions (Martynova & Renneboog, 2008). Therefore, some merger event analysts conclude from the positive returns to targets and the zero returns to acquirers that takeovers are on average value-enhancing activities (Scherer, 1988). However, the effectiveness of using market value to determine acquisition’s value-enhancing character is still under discussion.

Instead of analyzing acquisition impact from stock market, some papers examine the acquisition impact on acquisition-related operating performance by using accounting based measures. Similar to the findings in the stock market, previous studies do not reveal a consensual view on how acquisitions may contribute to acquirer’s operating performance. The difference in results could be the difference in dataset periods and difference in samples. For example, Mueller (1980)show evidence of a significant decline in the sales growth of US

Abnormal returns is calculated by subtracting the expected return for a security from the actual return for that

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security (Kohers & Kohers, 2000). This method is widely used because it is able to evade the problem of holding constant other factors that plagues ex post studies of mergers’ effects (Caves, 1989).

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companies following merges during 1962–1972, while Ghosh (2001)finds there is no statistically significant sales growth in US merged companies in the 1980s . 3

The operating performance based literature is not restricted to using single indicator; there are multiple accounting-based measurements to analyze merged-related operating performance. For example, Healy, Palepu, &Ruback (1992) adopt the measure of operating cash flow returns on asset as operating performance indicator, Melicher & Rush( (1974)4 use EBITD to total asset and Raghavendra &Vermaelen use the acquiring firms’ earnings per shares. The aforementioned studies suggest that profitability indicators can better evaluate the success of acquisitions because capital market studies have not been able to identify if equity gains are the result of real economic gains or just due to market inefficiency . 5

Furthermore, it is worth mentioning that the choice of indicator can substantially distort profitability based measures of M&A effect (Sharma & Ho, 2002). For example, it is found that there was no significant change in profitability for UK takeovers happened before 1984; but for takeovers in the period from 1985 to 1989 in which creative accounting practices initiated (accounting practices in relation to goodwill on acquisition), there was significantly positive change in profitability for UK takeovers (Sharma & Ho, 2002). Besides, studies which employ earnings based measures suggest that there were profitability losses in acquiring firm after mergers (Raghavendra & Vermaelen, 1998). Studies which use cash flow based measures show cash flow gains following takeovers (Sharma & Ho, 2002). It is acknowledged that the conclusions of whether mergers actually generate improvements in operating performance are not reliable if the study is lack of eliminating accounting distortions. Given the limited disclosure of accounting distortions, eliminating the measurement bias is still an impossible task (Sharma & Ho, 2002).

Ghosh (2001) compared pre-acquisition and post-acquisition performance of the acquiring companies. The

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average growth rate before the acquisition is calculated by dividing annual year-end sales by year-beginning sales. Following the acquisition, the acquisition-led sales growth is estimated by taking the difference between the median relative sales growths of years 1 to 3 after the event.

In Healy, Palepu, & Ruback (1992)’s study, cash flow is defined as sales less cost of goods sold, less selling

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and administrative expenses, add depreciation and goodwill amortization expense as a percent of the market value of assets in the beginning of the year. Abnormal asset returns are unlevered abnormal equity returns around acquisition announcement dates (Healy, Palepu, & Ruback, 1992)

The limitation of capital market based measurements is discussed in the final section.

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2.2 Channels in which M&As influence operating performance

Based on the review of previous research, it is found that the conclusions of acquisition impact on acquiring firm’s operating performance vary with the measurements. This finding is consistent with the common assumption that M&A may influence firm’s operating performance through different channels.

Melicher & Rush (1974) who use the earnings-based measurements(e.g. earnings before interest and taxes divided by total asset and return on asset) as operating performance indicators presume that acquisitions related transactions could influence the earnings. Melicher &Rush (1974) argue that firms with depressed earnings were able to increase profitability to an "average earnings performance" level, because M&As allowed them to merge with relatively more profitable firms and to diversify them into areas which were more profitable than their existing areas of operations.

In addition, the acquisition may also influence the profitability of the acquiring firm through increasing the project cash flows. Leland (2007) considered that the cash flows of the merged firm will be different from the sum of investments and cash flows of the separate firms (Leland, 2007). When the cash flows of operating activities are imperfectly correlated, risk can be lowered via a takeover or a merger because lower risk reduces the expected costs of default . The joint incorporation of the projects would be more valuable when project returns 6 have similar volatility and lower correlation (Leland, 2007). Comply with the cash flow theory, Healy et, al. (1992) find that merged firms have significant improvements in their operating cash flow in their post-merger performance.7

A study that investigates changes in acquirer’s return on equity finds that acquiring firms were able to significantly improve their return on equity after the acquisition through the

The post-merger asset risk is less than the acquirer's pre-merger asset risk, when the merger results in a

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reduction in leverage for the acquiring firm, and when the acquirer's bond maturity is less than the target's (T. Billett, King, & Mauer, 2004)

The research is conducted by Healy et, al. (1992) who examine the post-merger performance for the 50 largest

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employment of favorable financial leverage (Melicher & Rush, 1974). Indeed, previous studies also show that there is statistically proved correlation between the change of leverage ratio and the presence of acquisition deals. Ghosh and Jain (2000) found that firm’s financial leverage increases following acquisitions because acquiring firms normally have unused 8 debt capacity in pre-merger years.

On the other hand, a strong pressure from the takeover market may also force firms to increase leverage. Managers may take on debt so as to commit to paying out future cash flows, or in most cases, to commit to restructuring the firms (Rajan & Zingales, 1995). In return, the aggressive use of leverage may contributes to productivity gain since leverage substitute’s tax-deductible debt for equity and thereby transferring revenue to the owners of capital (Caves, 1989) However, there is a “Capital Structure Puzzle” which contradict with high leverage resulting in high productivity gain and high revenue. According to Berens & Cuny’s study (1995), high revenue firms often have low leverage. Their study explained that the value of the firm’s equity will depend on the growth rate of earnings: the higher the earning, the higher the value of equity is. Thus, the proportion of debt in the firm’s capital structure [D/ (E + D)] will be lower, the higher the firm’s revenue. All in all, there is no consentaneous conclusion on the relationship between firm revenue and its leverage ratio, but it is clear that the acquisition may also influence operating performance through its impact on the change of firm’s capital structure.

2.3 The determines of firm’s takeover decision

The previous studies generally fail to confirm any theory of the determinants of the acquisition activities. One of the consistent results is the association of acquisition activities with already large firms (Martynova & Renneboog, 2008). If the firm is larger in certain amount of capital like retained profits, newly-issued share capital, or a loan, which it plans to invest, it is more likely that they will invest in acquisition where the discounted marginal returns from the acquisition are higher than the discounted marginal returns from internal investment (Melicher & Rush, 1974). The larger firms are likely to be more acquisitive than smaller firm, it is also one of causes (reverse causation problem in econometrics studies) of endogeneity problem that is hardly to be resolved.

The financial leverage ratio is calculated by total liability/ total asset. Total liability is made of current liability

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There are also studies finding that acquirers tend to have lower levels of noncash working capital, and hold more cash than non-acquirers (Raghavendra & Vermaelen, 1998). A study investigates relation between equity-based compensation and CEO acquisitiveness reveals that equity-based compensation dramatically increases the likelihood that a firm becomes an acquirer (Boulton, Marcus V, & Frederik P, 2014). The positive relation between CEO acquisitiveness and equity-based is consistent with the notion that equity-based compensation increases managers' appetite for risk (Boulton, Marcus V, & Frederik P, 2014). Additional tests indicate that equity-based compensation is also positively correlated with the size and number of acquisitions. Moreover, acquirers are also more likely to use stocks as their payment method, and to acquire privately held firms when equity-based incentives are high. Their research results are also supported by Kohers et, al. (2000) and Raghavendra et, al. (1998).

3. Theory and hypothesis

Whatever the causes of acquisitions, the main aim in this paper is to examine whether the presence of acquisition activity is positively related to the firm’s operating performance.

Feeser & Willard (1990) argues that acquisitions can enhance production capacity of acquirng firm. For example, the acquier can purchase the facilities and assets of less successful competitors at less than the cost of building new facilities. Such acquisitions will create operating efficiencies for acquiring firm through lowering its total costs or earning higher profit margins than their competitors (Feeser & Willard, 1990). The evidence provided by Feeser &Willard (1990)shows the presence of acquistion events is positively related to the high growth company, and the growth opportunities exist even as the industry matured (Feeser & Willard, 1990). Koryak et al. (2015) also suggests that the firm’s operating performance can be developed if the business processes including M&As and strategic management are performed successfully . 9

The growth capability theory is raised by Felin, Foss, Heimeriks, & Madsen (2012)who argue that growth

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capabilities are developed through the interactions and complementarities among processes, individuals and structures (Felin, Foss, Heimeriks, & Madsen, 2012).

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There are nurmous papers discussing the syneries created by M&As. According to Chatterjee & Meeks (1996), when two firms run with an appropriate allocation of scarce resources, the improvement in allocated efficiency is expected to promote overall economic gains. In a world with taxes and default costs(compare with Modigliani-Miller’s assumption on “perfect world”), the takeover events that affecting optimal capital structure typically create financial synergies (Leland, 2007). These financial benefits include reductions in corporate tax liability, reductions in agency costs, and reductions in expected bankruptcy costs (Asquith & Kim, 1982).

In addition, the synergy theory claims that acqiustions contribute to operational performance because there are operational synergies from economies of scale, economies of scope and market power. Ramezani, Soenen, &Jung (2002)argue that acquiring a major rival enables a firm to substantially reduce competition within the industry and thereby increase revenue. What is more, Fee & Thomas (2004)remarks that gains from buying power or monopolistic collusion are distinct from efficiency gains; the operational gains can affect not only the post-merger performance of the merging firms but also the performance of other firms that shared a product-market relationship with the merging firms . The conclusion made by Fee et, al. 10 (2004) is that improved productive efficiency and buying power are the sources of gains to horizontal mergers.

There are also other reasons for thinking that acquisition growth provide benefits for a firm. First of all, acquisition as an investment option has less delay between its purchase and commencement of activities (Melicher & Rush, 1974). The returns from the acquisition can materialize quicker because acquisition allows a company to acquire a ready-made investment which includes the personnel required to operate it (Melicher & Rush, 1974). As the study discussing the change of managerial structure pre- and post- acquisition argued, acquisitions could relax the managerial constraint of acquiring firm and thus allow higher rates of growth to be achieved (Datta, 1991). Additionally, some acquisitions can facilitate entrance for acquirer to new product areas. Such acquisitions provide new information in those areas therefore provide acquirers with new internal investment opportunities (Melicher

Fee et, al (2004) use a large sample of horizontal M&As from1980 to 1997 to investigart the their effect on

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& Rush, 1974). The return of internal investment offered by such acquisitions is much likely to be positive.

However, as discussed before, evidence provided by many finance literature shows that the corporate acquisitions do not always lead to improved corporate operating performance. That means, the advantages of acquisition growth and synergy gains from M&As are not fully correct and achievable. For example, firms which plan to achieve higher return on investment by acquiring an already existing plant or company may fail to get what it exactly prefers due to disturbances in investment process. As Dickerson et, al. (1997)said, “Had it begun the investment from scratch, it may well have designed something which was slightly different from what it has acquired.“ Therefore, the realised return of an intended investiment is less than the returns which the company expects to receive from it. What is more, Hogarty’s study (1970)inidate that investment performance of firms which involved in multiple acquistions was actully worse than the average investment performance of their peers in the industries.

Another agrument supporting the hyposis that acquistion do not have positive impact on operating performance is that there are problems (i.e. several agency problems ) within acquired firms. Admittedly, the problems may lead to the acquired firms’ vulnerability to acquisition, but at the same time, these intrinsic issues in target firms will delay the returns on the investment (Sharma & Ho, 2002). The acquiring firms thus cannot experience the benefits from acquistion immediately. Even if the acquired firm has no problems, there are also many other obstacles to make acquisition work. The difficulties may come from the process in intergrating with the existing organisational structure of acquiring firm, or come from the integration actions taken by managers (Birkinshaw, Bresman, & Håkanson, 2000) The success of post-acquisition integration process may leads to value-creation or vice versa. Therefore, to determine the success of acquistion, the researchers should take the post-acquisition integration process into consideration.

After the discussion of different theory and empirical evidence, there is no clear positive relationship between acquisition and firm’s operating performance. The success of the acquistion depends on many factors. The hypothesis therefore could be the presence of acquistion has no siginiticant effect on firms operting performance. This hypothesis will then be tested by using regression analysis.

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4. Theoretical Framework

Based on the literature review, acquisitions if done sucessfully can be a powerful tool to accelerate firms operating performance. Since there are many ways to measure the acquisition-related operating performance, previous researchers took different perspectives to investigate the channels through which acquistion deal can influence acquiring firm’s operating performance. For example, if the operating performance is measure by acquirer’s earnings ability, the acquisition may contribute to earnings form operating gains (e.g.increasing productivity, economy scale)and financial gains (e.g. high returns of internal investment); If operating performance is calculated from the profit perspective, the enhancing profit may come from the reduction in cost or tax benefits and cash flows etc. Therefore there could be relationship between the occurrence of the acquistion and firm performance. Besides, the operating performance may also relate to firm’s overall productivity, cash flows, returns on internal investiment and diversity of tax benefits ect. Takeover synergy (operating synergy plus financial synergy)theory and cash flow theory explain most of cases why firms want to involve in acquring other firms.

Alternatively, internal factors in a firm may also influence firm’s propensity to acquir. The previous literature has found correlations between acquissive firms and its cash reserves, tangible asset, managerial constraint and quity-based compensation.

5. Methodology

5.1 Regression-based methodology

The theoretical framework describes the relationships between firm’s operating performance, acquistions and other internal and external variables. To investigate in correlations and causal effet, this research will use regression analysis to estimate the relationship between the occurrence of acquisition and acquiring firm’s operating performance variable.

The revenue of firm is adopted to indicate the firm’s operating performance. Analysis of the regression acquisition dummy variable is used to test whether acquiring firms has higher operating performance than non-acquiring firms with similar characteristics. The estimate for the main explaintionary variable is tested at 5% significance level. The method is illustrated using a recent year (in 2016) data for acquiring and non-acquiring firms.

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Base on the theoretical framework, the operating performance relationship usually include more than one regressor (the regressors are depending on the channels through which acquistion can influence the operating performance). In this case, the multiple regression model is adopted:

Yi=α+β1Dacquisition_i+ β2X2i + β3X3i+…βkXki + Ɛi (i = 1, 2,...,n ) (1)

where Yi denotes the operating revenue (turnover) of firm i in 2016. Dacquisition_idenotes the acquisition dummy variable, taking the value one if firm i acquired any firms in 2016 and taking the value 0 otherwise. Xki denotes the i-th observation on the independent variable with Xk for k = 2,...,K. α is the intercept and β2, β3,...,βK are the slope coefficients. The Ɛi is the disturbance which satisfies the following assumptions.

Assumption 1: The disturbances have zero mean. E(Ɛi) = 0 for every i = 1, 2, . . . , n; Assumption 2: The disturbances have a constant variance. Var(Ɛi) = σ2_;

Assumption 3: The explanatory variable is not correlated with the disturbances; Assumption 4: The disturbances are independent and identically distributed.

In order to make sure I can solve for the OLS estimators in (1), a further assumption is imposed for multiple regression model:

Assumption: There is no multicollinearity between variables.

5.2 Methodological issues

To have a validated research result by using regression-based methodology, it is vital to design an internally valid study and have unbiased and consistent estimator of acquistion effect.

Powell & Stark (2005) suggest that, to examine whether merging companies outperform their non-merging peers, there should be an adjustment for industry trend. In addition, to isolate acquistion effect, controlling for company’s size, pre-acquistion performance and Market-to-book ratio is the theoretically necessity (Melicher & Rush, 1974). Based on the literature 11

Market-to-book and price-to-earnings ratios indicate that the market assigns higher valuations to acquiring

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which addresses the chanels through which acquistion may influence the firm’s operating performance, the leverage ratio which reflects the firm’ potential tax benefits agency cost and benefits is also associated with firm’s revenue perfromance. Therefore, the industry of the firm, the size of the firm, market-to-book ratio and leverage ratio of the firm are included in the regression model.

In addition, there are many factors that make M&A attractive similar to the ones helping the firm to generate high profitability. If those factors are not included in the regression model, it cause correlation between estimator and error term therefore biases the conclusion. By following the previous literature, cash reserves ( cash and short-term investment) and tangible fixed asset are related to the presence of the acquistition activity (to become an acquirer). Given the limited information about the managerial constrains or other related factors, some of acquisition determint factors are omitted from the regression model. By including cash reserves and tangible fixed assets in my research mode, I can also verify whether they are sufficient to mitigate the correlation between the takeover dummy variable with the error term.

5.3 Emipirical Model

The relationship between revenue, acquisition dummy, industry categories, and other firm’s characteristics could be expected to be linear. Given the modest size of the regression sample, it was decided to employ only the revenue of firm as the operating performance indicator, and use a simple linear function to represent the relationship. The basic regression model is shown as follows:

Revenue=α+β1*Xacquisition_dummy+β2*Xindustry_cat+β3*Xleverage+β4*Xmb_ratio+β5*Xcash +β6*Xtangibleasset+β7Xsize+Ɛ

Where

Revenue= operating revenue (turnover) in the year end

Xacquisition_dummy=1 if firm acquired any firms in 2007 and a value of 0 if otherwise.

Industry_cat= Factor variable. 22,31,32, 33,48,49,51,54 represent the firm’s first 2 digit NAISC 2012 (The industry classification codes)

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Lev=leverage ratio of the firm. Leverage ratio= (Long-term debt in 2016 + current liabilities in 2016)/total assets 2016

Size= Total asset in 2016

Cash= cash reserves . Cash reserves=current cash+ short term investment Tangible_asset= tangible fixed assets in 2016

MB_ratio= Market to book share price ratio (closed)in 2016

Hypothesis: H0: β1=0 H1: β1>0

6. Data

By using the Orbis Database, the samples of US companies were selected based on the country ISO codes. The public firms were selected by adding the filter that firms’ stocks are publicly listed. The industries were selected by using NAISC 2012 industry classification with the first 2 digits core codes . The selected firms should also reached one million 12

operating revenue in 2016.

By using the first matching strategy, there were 2239 firms found. The financial information of these companies (operating revenue, long-term debt, current liability, total asset, market-to-book ratio, cash and short-term investment, tangible asset) are also available from Orbis database. However, the samples used for regression analysis are much smaller than the numbers suggested due to missing data for relevant variables.

The included industries are 22-Utility, 31-Manufactures (food, beverage and tobacco product, textile mills

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textile product mills apparel manufacturing), 32-Manufacturing (food product, paper, printing and related support, petroleum and coal products etc.), 33-Manufacturing (primary metal, fabricated metal, Machinery manufacturing computer and electronic product, electrical equipment etc.) 48-Transportation and warehousing ( air, rail, water, etc.) 49-Transportation and Warehousing(postal. Courier and messengers, warehousing and storage) 51-Information, 54- Professional, Scientific, and Technical Services.

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The source of M&A deal data is from Zephyr database. By matching 2239 companies as 13

acquirers, 398 completed deals were found. The deals which had the same acquirer were added together. The total number of deals that each sample had was record as acquisition-variable data. For example, there were 380 firms had been an acquirer in 2016, the rest of firms were not.

According to the deal data, International Business Machines Corporation which belongs to manufacturing industry conducted the highest number of acquisitions in 2016 with the deal number up to 11. The deal data shows that the firms in information industry had involved in relatively higher number of deals than those in other industries, and firms in utility industry involved in the least number of deals.

7. Results and Interpretation

Summary statistics for variables included in the regression sample are shown in Table 1. The regression results for all independent variables is shown in Table 2

Table 1

Summary Statistics for Variables Used in the Regression Analysis

*The industry variable is not included because it is the factor variable.

Variable Number of

observation

Mean Standard

deviation

Min Maximum

Revenue 2058 3975851 1.17E+07 1289 2.16E+0.8

leverage 369 0.545 0.8697 1289 12.852

Market-to-book ratio 368 106.171 1969.718 0 37787.4

Cash (in thousand $) 372 1352,346 8269099 0 1.13E+08

Tangible fixed Asset(in thousand$)

371 3075357 3075357 0 2.73E+07

Asset(thousand$) 373 6040375 2.38E+07 349.53 3.22E+08

The 2239 companies were matched by usng BvD ID number. 13

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Table 2

Regression Results

The number of the observation is 306, which is less than the original number of samples due to missing data for relevant variables. The value of R2_{using statutory surplus is 0.956; the} value using adjusted surplus is 0.954.

From the regression result, it is shown that the acquisition events have negative effect on firm’s revenue. However, the null hypothesis (H0: β1=0) is not rejected at 5 % significance level. (The coefficient of the main explanatory variable is -366796.6, t=-0.78 with P >0.05).

The regression results indicate that there is no statistically significant negative effect of acquisition event on acquiring firm’s revenue in the same calendar year. The relationship between the presence of acquisition and firm’s revenue performance is weak. On the other hand, the regression results show significantly positive correlation between firm’s revenue and its asset and cash reserves. Additionally, the coefficients of industry factor variables show

coefficient std. error t p Acquisition dummy -366796.6 47086 -0.78 0.227 Lev -8636.94 245354.3 -0.034 0.972 cash 0.555529 0.425161 13.06 0.000 Tangible asset 0.01345795 0.12376 1.09 0.278 Industry_cat 22 23 33 48 49 51 54 -176789 711985.4 -404158.1 -426150.4 -42615.4 -2676672 0 (omitted because of collinearity) 1225934 1195521 663854 1563376 4046449 977207 -1.44 0.6 -0.61 -0.27 4.99 -2.74 0.150 0.552 0.543 0.785 0.000 0.007 Asset 0.7567894 0.02138 35.39 0.000 MB_ratio -10307.93 20671.53 0.618 0.618 constant 636448.8 668979.9 0.342 0.342

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that information industry and transportation industry have significantly positive relationship with firm’s revenue.

The weak relationship infers that acquisition gain is not directly related to the current revenue. The impact of acquisition on operating performance is not significant. However, the regression model is lack of robustness check by using other measurements to indicate operating performance. More discussions about limitations will be presented in the next section.

8. Discussion

8.1 Limitations of previous research under same topic

Basically, to determine the motives for a firm to become an acquirer, many researchers take perspectives of the target’s or bidder’s shareholders wealth effect (Martynova & Renneboog, 2008). However, looking at stock market reaction means one might overlook other aspects of M&A process in affecting outcomes (Bharadwaj, Bharadwaj & Konsynski, 1999).

Notably, previous Research using abnormal stock market returns to represent takeover effect presume that an acquisition announcement brings new information to the market, and investors’ prosperous expectations on firm’s development are reflected by the appreciating share prices and vice versa. However, Caves' (1989)review of studies examining firm’s post-takeover operating performance does not support this argument. The studies he reviewed show takeover events not merely fail to warrant acquisition benefits but actually reduce the profitability of acquired business unit (Caves, 1989). Scherer (1988) explained that the inconsistence between immediate stock market return and sequential operating performance is the result of market inefficiency, that is, higher share price simply resulting from market correction rather than from takeover synergy. The idea is that the abnormal returns are unsettling, using the stock market returns are not a good indicator for acquisition effect. Therefore, acquirers that enjoyed a positive abnormal return after announcement period neither indicate the positive correlation with acquisition events nor promise higher revenue growth in thereafter periods.

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In Ghosh’s (2001) study, the sample company is examined based on its first takeover deal, the one making more than one acquisition afterwards is dropped from the sample. The omission of sample could also bias the conclusion. Dicker et al. (1997) point out that companies which make more than one acquisition are dropped from the sample just before their second acquisition, if companies get better (or, indeed, worse) at acquisition then the omission of the results of further acquisitions could bias the results. Ghosh (2000)also uses long-time dimension to capture the first acquisition impact; he averages three-year of the performance data after the acquisition taken place14. Studies comparing acquirer’s pre-and post-acquisition operating performance usually examine little about the persistence of firm’s performance.

8.2. Limitations of this research

The existence of bias is inevitable when using regression-based methodology in this case. Firstly, the intercept may be affected by nonrandom errors arising from permanent temporary differences in prior performance between acquiring firms and their industry counterparts. Secondly, there is reverse causation problem when the acquisition dummy is defined as causal effect of operating performance. As mentioned before, high value firms are likely to be more acquisitive than low value firms. There is an reverse causation between dependent variable and the main explaintionary variable. What is more, econometrics study points out if there is an unknown outside factor drives the operating performance and acquisition events move together, controlling the presence of acquisition will have no effect on the change of firm performance. Thirdly, for technology firms, the revenue gain may come from the shared business activities such as research & development, marketing and distribution with the acquired firms. Therefore, the R&D and other factors are also related to revenue variable and acquisition variable. However, due to limited data in Orbis database, when the R&D expenditure is added as independent variable, the large number of samples are dropped due to missing data. The same situation happens when I add capital expenditures, cash flow and other variables into regression model. Consequently, correlation between the explanatory variable and the aforementioned variables which are omitted variables included in the error term introduces endogeneity. The problem of endogeneity in turn results in downward bias of the OLS estimate of acquisition.

The persistence of profits suggests that a dynamic framework is required to capture fully the impact of

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acquisitions on performance by looking the effect on performance in a long period ( Dickerson, Gibson, & Tsakalotos, 1997). Three-year time dimension of Ghosh’s (2001)data is considered difficult to capture true impact.

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In addition, the use of revenue as dependent variable is not sufficient to indicate firms’ operation performance. This research has adopted firm’s revenue as the operating performance indicator because the revenue performance is the direct way to detect a firm’s state of operation; the growth of revenue typically determines whether a company thrives, survives, or dies. However, the research result is lack of robustness check by using different accounting based measurements. The previous literature has mentioned that the measurement method may also influence the conclusions.

Last but not least, one-year base data is considered difficult to capture the true impact of acquisitions. Although the up-to-date information give a fresh look about the current acquisition activities, the limited dataset period still baises the results downwards. According to the literature review, acquisition activity may take some time to have an effect on the acquiring firms due to the integration process. Besides, the the problems within the targets may acctully destroy the success of acquisition with time goes by.

9. Conclusion and recommendation

The finance theory in merge and acquisition field has examined the impact of M&As from diverse perspectives. Most of studies investigate target’s or bidder’s shareholders wealth effect and some focus on how acquisitions influence operating performance. In general, acquistion is considered as value-enhancing activity because it may create financial synergies through the tax benefits, or operational gains through enhancing economy scale and buying power. Additionlly, acquistion of unsucessful competitor can promot acquiring firml’s growth capcity through lowering its total costs or earning higher profit margins. The acquisition may also influence the return of projects, the cash flows of the company in a positive way. However, corporate acquisitions do not always lead to improved corporate operating performance as the theory suggest.

This research has found recent evidence from US public firms which have reached one million revenue to test the relationship between acquiring firms operating performance and the presence of acquisition deals. The evidence provided by this research showed that the presence of acquisition has no significant influence on firm’s revenue in 2016. The possible explanations could be acquisition synergy cannot contribute to acquiring firm’s current

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revenue or the acquisitions on average are not value enhancing. Given the limitation of this research, further research is suggested to be done.

Further research should be formulated based on the limitations of this research. For example, use multiple-year base data to capture the true impact of acquisition activity. Investigate acquisition effect on long-term performance of acquiring firm and take the lag effect into consideration. Moreover, it is also suggested to use ROA and ROE as dependent variable to further verify the acquisition impact on operating performance. What is more, to mitigate the reverse causation problem, further research may focus on examining the validity of channel of acquisition in affecting the operating performance, such as investigate how the leverage ratio changes following acquisitions.

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