Applied Mergers and Acquisitions. Robert F. Bruner

exceed the premium paid for target; therefore M&A is a zero net present value (NPV) activity. Stock price activity at time of announcement was related to postacquisition cash flow performance. Parrino, Harris (1999) and Parrino, Harris (2001) 1982–1987 197 mergers Buyers experienced a significant +2.1% operating cash flow return after merger. This return is defined as operating cash flow divided by market value of assets. Postmerger returns were significantly higher where the buyer and target shared at least one common business line, or merged to take advantage of technology. Ghosh (2001) 1981–1995 315 mergers Buyers experienced returns on assets no different from a control sample following acquisitions. But cash flows increased significantly following acquisitions made with cash, and declined for stock acquisitions. Carline, Linn, Yadav (2001) 1985–1994 86 mergers Buyers and targets, combined, underperformed their industry peers in five years before merger, and outperformed their peers in five years after. Median change in performance of industry adjusted operating cash flows was +6.39%.* Sharma, Ho (2002) 1986–1991 36 mergers, Australian sample Comparing the three years before merger to the three years after, buyers showed significantly lower return on equity, return on assets, profit margin, and earnings per share.

      ROE = Return on equity.

      ROA = Return on assets.

      ROS = Return on sales.

      ROC = Return on capital.

*Significant at the 0.99 confidence level.

EXHIBIT 3.9 Excerpted Findings about the Change in Profitability of British Acquirers Following Acquisition

	Change in Profitability versus Industry and versus Predeal Performance	Percentage of Observations in Which Change in Profitability Is Negative
Year of transaction	0.148*	0.338†
Year +1	–0.015	0.536
Year +2	–0.010	0.517
Year +3	–0.058*	0.527
Year +4	–0.098*	0.660†
Year +5	–0.110*	0.642†
Year +6	–0.067	0.523
Year +7	–0.073	0.619

*Significantly different from zero at 1%.

†Significantly different from 0.5 at 5%.

      Source: Meeks (1977), page 25.

      The main observation from Mueller’s findings is that acquirers reported worse returns in the years after acquisition than their nonacquiring counterparts—but not significantly so. The most strongly negative results are shown in the right-hand column, notably in the low percentage of the sample that offered a positive comparison. Commenting on the results for all seven countries, Mueller wrote:

       No consistent pattern of either improved or deteriorated profitability can therefore be claimed across the seven countries. Mergers would appear to result in a slight improvement here, a slight worsening of performance there. If a generalization is to be drawn, it would have to be that mergers have but modest effects, up or down, on the profitability of the merging firms in the three to five years following merger. Any economic efficiency gains from the mergers would appear to be small, judging from these statistics, as would any market power increases. (Page 306)

Ravenscraft and Scherer (1987) studied 471 acquirers between 1950 and 1977. The novelty in this study was the reliance of the researchers upon a special line-of-business database maintained by the Federal Trade Commission that would permit greater definition of control groups than in previous studies, and more careful assessment of asset values and the impact of accounting method choices. The drawback to the line-of-business focus is that acquisition synergies might occur in other areas of the acquiring firm, and therefore might be missed by this study. Also, the comparison in postmerger years is undermined by misalignment with the merger year.⁹ The researchers considered the ratio of operating income to assets. Strengthening the analysis are controls for industry effects, accounting method choices, and market shares. Their principal finding is that profitability is one to two percentage points less for acquirers than for control firms—these differences are statistically significant. Purchase accounting and the entry into new (i.e., diversifying) lines of business are associated with material and significant decreases in profitability.

EXHIBIT 3.10 Excerpts of Findings about Change in U.S. Acquirers’ Profitability Following Acquisition

	Acquirers: Three Years after versus Five Years before Compared to Two Control Group Companies (% Difference/% Positive)	Acquirers’ Postmerger Performance Compared to Their Base Industry Peers (% Difference/% Positive)	Acquirer’s Postmerger Performance Compared to a Projection of Performance Based on a Control Group and Industry Trends (% Difference/% Positive)
What it means	Change in profitability of acquirers compared with a randomly selected nonacquiring firm.		Change in profitability of acquirers compared with a nonacquiring firm matched on size and industry.		Change in profitability of acquirers compared with what it would have been if they had followed industry trends.
Pretax