Investigation into the effects of M&As on firms' operating performance and employment in the U.K.

Abstract

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 announcement.

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.