An empirical investigation of UK mergers and acquisitions 1980-90
An important part of this study is the attempt to reconcile the contradictory findings about mergers and acquisitions reported in the financial economics and the industrial economics literatures. This is done by using both share price and accounting data, an approach not used in previous work. Financial economics characterises the market for corporate control as rival management teams competing for control over corporate assets. Takeovers represent a necesssary external discipline, whereby inferior management is displaced by those with superior management skills. Using share price data, most empirical studies support this characterisation and mergers as efficiencyenhancing transactions. In contrast, studies in the industrial economics literature have used accounting data to show that acquiring firms do not exhibit superior pre-merger performance and that mergers generally result in a decline in profitability post-merger. Results from the first phase of the empirical work tends to support the latter view, with a certain degree of compatibility between results with accounting data and those with share price data. At this stage the disciplinary hypothesis is not supported. Another important part of this study investigates the impact of business and merger cycles on merger outcomes at the level of the firm. This work is prompted by the failure of previous studies to take account of the empirical literature on the modelling of merger cycles. The importance of calendar time is confirmed by the results obtained. The full 1980-90 sample incorporates different phases of the business and merger cycles and the results with both accounting and share price data for this period are similar but rather inconclusive. I lowever, when the sample is divided to reflect different phases of the business and merger cycles a very different picture emerges. In the period 1980-85 when takeover activity was low and competitive pressures in product markets were intense, acquiring firms on average appeared to adopt strategies consistent with the disciplinary hypothesis and delivered wealth gains to shareholders. In contrast, during 1986-90, when merger activity was at record levels and the economy was in an expansionary phase, shareholders of acquiring firms suffer substantial wealth losses, consistent with managerialist strategies. The accounting results corroborate these share price findings: they show that relative to targets and industry norms acquirers in the first sub-sample exhibited superior performance, consistent with the disciplinary hypothesis, while those in the second sub-sample did not. These empirical results also provide an opportunity in the last part of the thesis to examine current UK merger policy. The time dependent nature of private returns suggests that mergers can be both a symptom and a remedy for agency problems. To the extent that such problems have implications for competition and economic efficiency, the results suggest that major shifts in policy are not warranted. However, the results for 1986-90 do suggest that there is a need to redress the information asymmetry between management and shareholders by extending the information disclosure provisions of the City Code. In public policy terms, increasing the information available to the shareholders of acquiring firms could have the desirable property of reducing the number of mergers that destroy value and reduce economic efficiency.