This study examines the post-acquisition operating performance and the employment
effects of 79 takeovers that took place in the U.K. within the period from January 1990 until
December 1996. The aims of the research are (1) to investigate whether M&As, on average,
are followed by an increase in post-takeover operating performance, (2) to examine the
operating performance of merging firms that share certain common characteristics, (3) to
examine whether the stock market can forecast the post-merger changes in operating
performance in the period of the event announcement, (4) to investigate what is the impact of
M&As on merging firms' employment rates and costs.
on merging firms' employment rates and costs.
The findings suggest that merging firms experience a decline in their post-acquisition
operating performance, regardless of whether the effects of pre-acquisition performance on
post-merger performance are controlled for or not. However, Strategic acquisitions and
related acquisitions exhibit a post-takeover performance improvement. Hostile acquisitions
are followed by a performance decline and whether the acquirer paid a relatively high
premium for the acquiree or not has no significant effect on post-merger performance. Large
acquisitions perform better than all other acquisitions, especially when the target and the
bidder operate in the same industry. Performance was adjusted using both industry-median
firms and pairs of matched firms on the basis of industry relatedness, pre-acquisition
performance and size for each target and bidder. These results are not sensitive to the
benchmark used to adjust operating performance. Acquisitions financed solely by cash
underperform those financed solely by stock or by a combination of stock and cash.
We find a positive and statistically significant relationship between the operating cash
flow returns on assets in the post-takeover years and the combined cumulative marketadjusted returns on assets at the time of the event announcement, after controlling for the
effects of pre-merger performance on post-merger performance. However, we identify a
degree of optimism on behalf of the stock market agents in the period of the event
There is no significant evidence that employee costs per thousand pounds of sales
decline in the three years following the acquisition completion. Merging firms employ as many
employees per thousand pounds of sales as their industry peers in the pre-merger period,
whereas employment rates fall below industry's norms in the post-takeover period.
Nonetheless, no statistically significant change was identified in the median number of
employees per thousand pounds of sales between the post- and the pre-merger periods.
Finally, our evidence suggests that hostile acquisitions are followed by job losses and by an
increase in costs per employee, while related acquisitions are followed by a decrease in costs
per employee without a decrease in the number of employees.
The findings of the research imply that shareholders are more benefited from
acquisitions where synergies are more likely to occur. The finding that, on average, posttakeover performance declines is consistent with a view that competition in the market for
corporate control in the U.K. is strong and that there are not many opportunities for a large
number of profitable takeovers. However, this decline may imply that managers have non
profit-maximising objectives, when taking acquisition decisions, in a market for corporate
control where competition is weak. Alternatively, in a market for corporate control where
competition is weak, managers may take acquisition decisions with the expectation to
increase profits, but fail to do so. Which of these interpretations better explain managerial
objectives needs further investigation. Finally, the findings may bear some interesting
implications for government policy with regard to which acquisitions create value and contribute to the social benefit and which acquisitions serve the aims of employment policy.