What Goes Wrong in M&As? On the Long-Run Success Factors in M&As

Mergers and acquisitions (M&As) are among the most important events in a company’s lifecycle and have a significant impact on the firm’s operations and activities. Despite the vast amounts of money and resources spent on takeovers and the hundreds of academic studies investigating firm performance around and after a merger, the factors determining a deal’s ultimate success are still not well understood. Our paper “What Goes Wrong in M&As? On the Long-Run Success Factors in M&As” provides an overview of the academic literature on the market for corporate control, and aims to identify which factors consistently contribute to and which factors hurt long-run deal success.

A large body of literature shows that bidder shareholders earn zero or even negative returns at the takeover announcement, especially for large and public deals. When studying the performance of the merged firm over a longer time window (two to three years subsequent to the transaction), many studies equally show that bidders’ shareholders receive little to no return on takeover deals, and positive short-run announcement returns often do not materialize in the long run. Considering the ambiguous findings in terms of short- and long-run deal performance and the apparent lack of long-term value creation for the acquiring firms, we wonder: what goes wrong in takeovers? Why do bidders persist in undertaking M&As while decades of research show that the ex-ante probability of a successful and profitable takeover is low? What are the factors that contribute to a deal’s long-term success or failure?

Our study of the literature finds a set of three deal characteristics that prove to be consistent predictors of both short- and long-run stock returns as well as long-run operating performance. First, serial acquisition performance declines deal by deal as the firm increases its acquisitiveness. Most evidence indicates CEO overconfidence as the main driver of this underperformance, as serially acquiring managers overestimate their ability to identify profitable target firms and to create synergy gains. In addition, there is some evidence that successful acquiring firms and CEOs travel a learning curve, especially when targets are sufficiently similar, whereas unsuccessful acquirers lack the required resources and abilities to achieve learning gains.

Second, related or focused acquisitions outperform unrelated or diversifying acquisitions, as acquirers in the former case are more likely to have the skills and resources required to operate and integrate the target firm. These findings hold regardless of whether relatedness is measured by means of industry classifications, product market overlap, strategic compatibility, cultural similarities, complementarities in the supply chain, or technological overlap.

Third, deal performance is also positively affected by shareholder intervention in the form of voting or activism (particularly by institutional investors) and by long-term investors’ monitoring and advisory skills, provided they are not distracted by shocks to other parts of their portfolios.

Our literature survey identifies many more dimensions that affect deal success. However, these factors are less consistent predictors for future M&A performance when comparing various event windows and return measures: for example, CEO equity-based compensation contracts increase short- and long-run stock returns, but little can be said about the implications for long-run operating performance.  In contrast, board members with multiple directorships, which usually proxies for reputation and skill, increase long-run operating performance, but evidence for long-run stock returns is scarce. In sum, long-run evidence for other factors such as CEO incentives, CEO and board connections, ownership structure, method of payment, sources of financing, target financial distress, post-merger restructuring, target acquisitiveness, political economics, and governance spillovers is mixed or limited in scope (with no studies investigating both long-run stock returns and long-run operating performance), which provides scope for future research.