The effect of European Merger and acquisition deals on firms performance in the crisis and pre-crisis period

• Main Author: El-Alawa, Y. (Yasmin)
• Format: Dissertation
• Language: English
• Published: University of Oulu 2017
• Subjects: Accounting
• Online Access: http://urn.fi/URN:NBN:fi:oulu-201706062588; http://nbn-resolving.de/urn:nbn:fi:oulu-201706062588

Mergers and Acquisitions are considered as one of the most important corporate events for a company’s growth strategy. This concept dates as far back as the early 1900s, when it began on a domestic scale. In this study, we evaluate the effect of M&A deals on firm performance in the crisis and pre-crisis period. We intend to figure out whether the financial crisis presented a great increase to the bargaining power of business entities in the European financial market. We do this through examining the stock performance surrounding the days leading to the announcement of an M&A deal. We then turn to divide our data into two to examine the separate effect of M&A’s in the crisis and pre-crisis period on the returns to both target and acquiring firms. Next we look at the role that a particular method of M&A financing and industry relatedness play in determining the CAR of acquirer and target firms around the M&A announcement. Firstly, we find with our full sample of 181 M&A deals that in general M&A’s have a positive effect on the performance of the target and acquirer firm although the positive effect is more pronounced (significant) for the target firm than for the acquirer firm. Secondly, we investigate the separate effect of a crisis and pre-crisis period on the CAR of the acquirer and target around the announcement day. We find that Acquirer firms earn positive CAR in the crisis period but they turn negative in the pre-crisis period. However, for the target firms, we find significantly positive CARs during the pre-crisis period than during the crisis period. Thirdly, we investigate the effect that a chosen method of financing will have on the acquirer’s performance during the crisis period and find more highly positive CARs for the acquirer’s that use cash instead of stock as a means of financing their deals. Therefore during the crisis, cash financed deals have a more positive impact on the acquirer’s performance than do stock financed deals. We finally turn to look at the effect of the direction of a firm’s diversification on its performance during the financial crisis period, and find that during the crisis period acquisition made in related industries have a positive effect on the acquiring firm’s performance. The CAR to the acquirer for acquiring targets in unrelated industries is negative which implies that during the crisis period acquisition made in unrelated industries have a negative effect on the acquiring firm’s performance. In a nutshell, we see that most of our results are in line with previous empirical studies. The result of this thesis is beneficial for both institutional and individual investors as they might be prone to a lot of lemon investment if they don’t meticulously scan the M&A market. In accordance with the signaling theory, investors can now have an idea about the current and future condition of the acquiring firm. Investors should be on the lookout for firms that use more cash financing than equity financing since the use of cash is a signal of good new but the use of stock is a signal of bad new to investors. Also acquirers should not relent in their due diligence process especially during the crisis period when it would prove to be most valuable. By undergoing a proper due diligence process acquirer are sure to make accurate and informative decision that may have a positive impact on their overall performance.