Study of M&A performance has been part of the strategic management, corporate finance, and organizational behavior literature for decades. Researchers have made use of various criteria in their attempt to appraise M&A performance. For instance, Zollo and Singh (2004) found "there exists much heterogeneity both on the definition of the performance of M&As and on its measurement". In a study of 88 empirical conducted between 1970 and 2006, Zollo and Meier (2008) acknowledged 12 different approaches, varying along several scopes, for measuring the impact of M&As. Essentially, there are four commonly used performance evaluation approaches in M&A field which can be classified as quantitative and qualitative methods:
Quantitative approaches
Event studies (stock-market-based measures), both in the short run and long run;
Accounting studies;
Qualitative approaches
Executives survey studies; and
Clinical studies.
Cording et al. (2010) reported 92 percent of empirical works used event study and accounting-based methods. According to Zollo and Meier (2008), only 28 percent of researches use accounting based measures, while 41 percent of the total reviewed articles use short-term event study.
It is undeniable that each research approach has its own advantages and disadvantages. Thus the conclusion reached from different measures also varied. For example, Tuch and O'sullivan (2007) concluded that the announcement effect of mergers is insignificant on short-run event study, and long-run event studies performance measurement is tremendously negative, and results are combined when making use of accounting methods.
4.1 Event Studies
Event study has been dominant empirical financial research approach since the 1970s (Martynova and Renneboog, 2008) and is broadly applied in M&A study. Event studies measure the abnormal returns to the shareholders for the period surrounding the announcement of the merger. Abnormal return is fundamentally the difference between the raw returns which is basically the change in the share prices and a benchmark index calculated by for example the Capital Asset Pricing Model (CAPM) or S&P500, among others (Krishanmurti and Vishwanant, 2008). The first event study is said to be done by Fama, Fisher, Jensen & Roll in 1969, who examined the stock splits to public listed companies. Ever since, it has become an influential tool that help companies to investigate effects of an event on stock return (Boehmer et al., 1991; McWilliams & Siegel, 1997; MacKinlay, 1997). Indeed, stock returns reflect immediate, unbiased, rational, and risk-adjusted expectations of firm value in future based on the arrival of new information.
Researchers usually identify a period (event window) over which the impact of the event will be analysed which can be classified into short-term and long-term event study. "The short term approach assumes stock market efficiency that means the stock market reaction to acquisitions when they are announced or completed provides a reliable measure of the expected value of the acquisition. The long term performance assessment assumes the stock market spends time to evaluate the value implications of acquisitions and wait new information about the progress of the merger. Besides, the probability of M & A will be analyzed" (Sudarsanam, 2003, p.71).
Whether value is created or destroyed as a result of a merger can be directly measured by event study since it is a forward looking approach. It also has few backdrops as it is underlined by many assumptions about the stock market and event based study is prone to confounding events, which could skew the returns for particular companies at particular events.(Bruner,2002)
Evidence using Event Studies
Owing to the large number of empirical studies, as well as the variety of samples and sampling techniques used, the main findings have been tabulated. The subsequent discussion therefore focuses on highlighting the main findings and identifying how specific studies have contributed to our understanding of measures of acquirer performance and the factors that influence it. Table 1 contains a summary of studies examining the short-run impact of acquisitions, while Table 2 includes details on long-run studies.
Short-run event studies
The 'short-run' event period over which the performance of bidding companies is measured varies noticeably between researches with some studies analysing performance in so far as four months prior to the bid announcement (Franks and Harris 1989) and up to three months afterwards (Higson and Elliot 1998). Regardless of the event window selected, however, the evidence on the whole suggests little if any positive returns to shareholders in acquiring companies. Of the studies reviewed in Table 1, only the early studies in the US by Asquith et al. (1983) and in the UK by Franks and Harris (1989) observed significant positive returns to acquirers Indeed it is to be noted that both of these studies included takeovers during the period when takeovers appear to have been more beneficial to acquiring firm shareholders (Bradley et al. 1988; Bruner 2002). Franks and Harris conducted their research in 1950s while Asquith et Lal conducted theirs in 1960s.
The remaining studies from both the UK and US come to the conclusion that either no significant difference in the returns of acquirers or significantly negative returns around the bid announcement. In addition, as can been noticed from Table 1, more recent research appears to conclude increasingly negative performance of acquirers, a finding in line with evidence presented by Andrade et al. (2001). Moreover, it must be noted that recent evidence from other countries tends to be more positive compared to findings documented for UK and US. For example, Campa and Hernando (2004) point out insignificant gains from a sample of Continental European takeovers, while Ben-Amar and Andre (2006) report positive announcement returns from a sample of listed Canadian companies.
Sudarsanam and Mahate (2003) report significantly negative abnormal returns of 1.4%, over the −1 to +1 day period, with only a third of acquirers experiencing wealth gains based on their research on a sample of 519 UK acquirers between 1983 and 1995. This evidence is largely consistent with other UK studies by Sudarsanam et al. (1996) and Holl and Kyriazis (1997). For the extended post announcement period of +2 to +40 days, Sudarsanam and Mahate (2003) also proclaim generally negative abnormal returns but do not find the differences to be statistically significant - findings broadly similar to Limmack (1991) and Gregory (1997). However, almost 50% of acquirers are shown to experience wealth losses over the extended event window.
Long-run event studies.
Motivated by early studies suggesting that M&As may have a negative impact on the long-run wealth of shareholders (Asquith 1983; Malatesta 1983), the long-run post M&A performance has also been subject to a great deal of research. As shown in Table 2, recent studies advocate that M&A produce either insignificant or negative abnormal returns in the long run. In the UK, for example, Limmack (1991) reports significantly negative returns for a sample of 448 takeovers between 1977 and 1986. Consistent with his findings is that of Kennedy and Limmack (1996) for their research on takeovers during the 1980s, and Gregory (1997) based on his study of takeovers between 1984 and 1992. Finally, Sudarsanam and Mahate (2003, 2006) also report significant negative returns in the post-bid period. Table 2 also illustrates that recent evidence from US studies is broadly consistent with the UK findings cited above, with Agrawal et al. (1992), Loughran and Vijh (1997) and Rau and Vermaelen (1998) reporting significant negative returns.
A recent research by Alexandridis et al. (2006) uses the three-factor model formulated by Fama and French (1993) and the traditional capital asset pricing model (CAPM) methodology. Both models experienced a negative abnormal return of around −1%. Gregory and McCorriston (2005) find that bidders lose −9.36% and −27% in years +3 and +5 following the announcement while there were no significant returns for years 0 to +2. Hence, the overwhelming consensus is that shareholders in acquiring companies suffer significant wealth losses when long-run returns are considered.
4.2 Accounting Studies
