The Long-Term Operating Performance of European Mergers and Acquisitions

M. Martynova, S. Oosting, L.D.R. Renneboog

Research output: Working paperDiscussion paperOther research output

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Abstract

We investigate the long-term profitability of corporate takeovers of which both the acquiring and target companies are from Continental Europe or the UK.We employ four different measures of operating performance that allow us to overcome a number of measurement limitations of the previous literature, which yielded inconsistent conclusions.Both acquiring and target companies significantly outperform the median peers in their industry prior to the takeovers, but the raw profitability of the combined firm decreases significantly following the takeover.However, this decrease becomes insignificant after we control for the performance of the peer companies which are chosen in order to control for industry, size and pre-event performance.None of the takeover characteristics (such as means of payment, geographical scope, and industry-relatedness) explain the post-acquisition operating performance. Still, we find an economically significant difference in the long-term performance of hostile versus friendly takeovers, and of tender offers versus negotiated deals: the performance deteriorates following hostile bids and tender offers.The acquirer's leverage prior takeover seems to have no impact on the post-merger performance of the combined firm, whereas the acquirer's cash holdings are negatively related to performance.This suggests that companies with excessive cash holdings suffer from free cash flow problems and are more likely to make poor acquisitions.Acquisitions of relatively large targets result in better profitability of the combined firm subsequent to the takeover, whereas acquisitions of a small target lead to a profitability decline.
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Number of pages40
Volume2006-111
Publication statusPublished - 2006

Publication series

NameCentER Discussion Paper
Volume2006-111

Fingerprint

Mergers and acquisitions
Operating performance
Profitability
Industry
Tender offers
Cash holdings
Peers
Bid
Payment
Long-term performance
Median
Corporate takeovers
Free cash flow
Leverage
Mergers

Keywords

  • takeovers
  • mergers and acquisitions
  • long-term operating performance
  • diversification
  • hostile takeovers
  • means of payment
  • cross-border acquisitions
  • private target

Cite this

Martynova, M., Oosting, S., & Renneboog, L. D. R. (2006). The Long-Term Operating Performance of European Mergers and Acquisitions. (CentER Discussion Paper; Vol. 2006-111). Tilburg: Finance.
Martynova, M. ; Oosting, S. ; Renneboog, L.D.R. / The Long-Term Operating Performance of European Mergers and Acquisitions. Tilburg : Finance, 2006. (CentER Discussion Paper).
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Martynova, M, Oosting, S & Renneboog, LDR 2006 'The Long-Term Operating Performance of European Mergers and Acquisitions' CentER Discussion Paper, vol. 2006-111, Finance, Tilburg.

The Long-Term Operating Performance of European Mergers and Acquisitions. / Martynova, M.; Oosting, S.; Renneboog, L.D.R.

Tilburg : Finance, 2006. (CentER Discussion Paper; Vol. 2006-111).

Research output: Working paperDiscussion paperOther research output

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AU - Martynova, M.

AU - Oosting, S.

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N2 - We investigate the long-term profitability of corporate takeovers of which both the acquiring and target companies are from Continental Europe or the UK.We employ four different measures of operating performance that allow us to overcome a number of measurement limitations of the previous literature, which yielded inconsistent conclusions.Both acquiring and target companies significantly outperform the median peers in their industry prior to the takeovers, but the raw profitability of the combined firm decreases significantly following the takeover.However, this decrease becomes insignificant after we control for the performance of the peer companies which are chosen in order to control for industry, size and pre-event performance.None of the takeover characteristics (such as means of payment, geographical scope, and industry-relatedness) explain the post-acquisition operating performance. Still, we find an economically significant difference in the long-term performance of hostile versus friendly takeovers, and of tender offers versus negotiated deals: the performance deteriorates following hostile bids and tender offers.The acquirer's leverage prior takeover seems to have no impact on the post-merger performance of the combined firm, whereas the acquirer's cash holdings are negatively related to performance.This suggests that companies with excessive cash holdings suffer from free cash flow problems and are more likely to make poor acquisitions.Acquisitions of relatively large targets result in better profitability of the combined firm subsequent to the takeover, whereas acquisitions of a small target lead to a profitability decline.

AB - We investigate the long-term profitability of corporate takeovers of which both the acquiring and target companies are from Continental Europe or the UK.We employ four different measures of operating performance that allow us to overcome a number of measurement limitations of the previous literature, which yielded inconsistent conclusions.Both acquiring and target companies significantly outperform the median peers in their industry prior to the takeovers, but the raw profitability of the combined firm decreases significantly following the takeover.However, this decrease becomes insignificant after we control for the performance of the peer companies which are chosen in order to control for industry, size and pre-event performance.None of the takeover characteristics (such as means of payment, geographical scope, and industry-relatedness) explain the post-acquisition operating performance. Still, we find an economically significant difference in the long-term performance of hostile versus friendly takeovers, and of tender offers versus negotiated deals: the performance deteriorates following hostile bids and tender offers.The acquirer's leverage prior takeover seems to have no impact on the post-merger performance of the combined firm, whereas the acquirer's cash holdings are negatively related to performance.This suggests that companies with excessive cash holdings suffer from free cash flow problems and are more likely to make poor acquisitions.Acquisitions of relatively large targets result in better profitability of the combined firm subsequent to the takeover, whereas acquisitions of a small target lead to a profitability decline.

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KW - means of payment

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KW - private target

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Martynova M, Oosting S, Renneboog LDR. The Long-Term Operating Performance of European Mergers and Acquisitions. Tilburg: Finance. 2006. (CentER Discussion Paper).