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Do synergies exist in related acquisitions? A meta-analysis of acquisition studies

Abstract

Mergers and acquisitions (M&A) aim to increase the wealth of shareholders of the acquiring company, in particular by creating synergies. It is often assumed that relatedness is a source of synergies. Our study distinguishes between business, cultural, technological, and size relatedness. It discusses the reasons why these different forms of relatedness can lead to an acquisition success and we conduct a meta-analysis of 67 prior M&A studies. Results indicate that positive effects can be expected under specific conditions only and have a limited overall impact on acquisition success. A moderator analysis finds that synergies stemming from relatedness depend on industry-, country-, and investor-characteristics.

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Fig. 1
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Notes

  1. 1.

    Sudarsanam’s (1995) review includes only four prior studies. His conclusions should be considered with care.

  2. 2.

    This is in contrast to financial synergies, where dissimilarity of firms is considered to be the most important source of benefits (Chatterjee 1986). “In sum, mergers of similar firms tend to have greater financial synergies when the correlation of cash flows is low and volatilities are somewhat lower than the base case” (Leland 2007). Unfortunately, cash flows in related acquisitions tend to be correlated by definition because the acquisition takes place in a similar or at least linked business. That is why financial synergies are most likely to be achieved in unrelated diversification.

  3. 3.

    According to Jensen and Ruback (1983) a takeover is defined as a transfer of the target’s control rights from the target’s management team to the bidding firm’s management. Such activities take place on the market for corporate control: managers’ fears of becoming a target act as a control mechanism effectively aligning their interests with those of the shareholders. The term “acquisition” is a mere purchase (of control rights) whereas the term “merger” describes the combination of two firms to one legal entity that have been different legal entities before (see, e.g. Bruner 2002, p. 1). Berkovitch and Khanna (1991) define a merger as an offer made to the target’s management. The merger offer leads to bargaining between the two parties. Negotiations take place in relative secrecy. In contrast, a tender offer is made directly to the target’s shareholders and conveys more information to the public. Another way to acquire control over a target firm is the proxy contest in which the amount of voting rights is decisive (Bebchuk and Hart 2001).

  4. 4.

    Most of the studies we included in the meta-analysis do also not explicitly distinguish between acquisitions and mergers and use the general term M&A. Other authors treat M&A the same way (Gugler et al. 2003).

  5. 5.

    Rumelt’s typology includes the major categories: dominant business, related constrained, related linked and unrelated (conglomerate) businesses and has been applied in various studies (Baysinger and Hoskisson 1989; Bettis and Hall 1982; Montgomery and Singh 1987).

  6. 6.

    For example, Datta et al. (1991) review the literature on diversification and find inconclusive evidence. Palich et al. (2000) conduct a meta-study and establish an inverted U-curve, i.e. diversification is profitable when a firm has been a single business firm and then diversifies into related businesses. But diversification lowers profitability when the firm switches from related to unrelated diversification. In the following sections we present some conflicting findings on the effects of the relatedness variables on acquisition performance.

  7. 7.

    As single entities these projects would not exist. Fluck and Lynch (1999) consider this approach consistent with diversified firms suffering from a conglomerate discount in financial markets and thus displaying a lower value than focused firms. Nonetheless, in this case, the combined entity has a higher value as compared to stand alone firms.

  8. 8.

    In Scanlon et al. (1989) abnormal returns for small-related acquisitions are positive but not significant whereas for large acquisitions CARs are significantly negative.

  9. 9.

    However, this result only holds concerning public targets.

  10. 10.

    Included studies are listed in the reference section. Two studies are counted as four studies because both studies use two independent samples.

  11. 11.

    In their study the authors talk about a combined sample size of 206,910 M&As. This number is obtained by adding up sample sizes of different correlations from one study.

  12. 12.

    So called “purchase” accountings tend to perform better, but “pooling” accounting has been abolished in the meantime (Lindenberg and Ross 1999). Andrade (1999) finds that the accounting method is used by acquirers to improve earnings dilution effects.

  13. 13.

    In some cases variables had to be coded in opposite directions in order to measure the effect of relatedness (and not of distance) on performance (and not on without-performance).

  14. 14.

    The 5-day-window covers days −2 to +2 relative to the transaction announcement date as mentioned in Sect. 3.5.

  15. 15.

    The 201-day-window covers days −100 to +100 relative to the transaction announcement date as mentioned in Sect. 3.5.

  16. 16.

    Of the former EU-25 11 countries have strong co-determination laws: Austria, Czech Republic, Denmark, Finland, Germany, Hungary, Luxemburg, Netherlands, Slovak Republic, Slovenia, Sweden. In the UK, Greece, France, Italy and Spain such labor laws are absent. In the UK the influence of labor unions is dependent on the business segment.

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Correspondence to Fabian Homberg.

Appendices

Appendix A

See Tables 10 and 11.

Table 10 Operationalization of relatedness and firm size within the studies
Table 11 Operationalization of acquisition performance within the studies

Appendix B

Studies in the Meta-Analysis

  • Ahuja G, Katila R (2001) Technological acquisitions and the innovation performance of acquiring firms: a longitudinal study. Strateg Manag J 22:197–220

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  • Barkema HG, Vermeulen F (1998) International expansion through start-up or acquisition: a learning perspective. Acad Manag J 41:7–26

  • Baysinger B, Hoskisson RE (1989) Diversification strategy and R&D intensity in multiproduct firms. Acad Manag J 32:310–332

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  • Buchholtz AK, Ribbens BA, Houle IT (2003) The role of human capital in postacquisition ceo departure. Acad Manag J 46:506–514

  • Cannella AA, Hambrick DC (1993) Effects of executive departues on the performance of acquired firms. Strateg Manag J 14:137–152

  • Capon N et al (1988) Corporate diversity and economic performance: the impact of market specialization. Strateg Manag J 9:61–74

  • Capron L, Pistre N (2002) When do acquirers earn abnormal returns? Strateg Manag J 23:781–794

  • Cassiman B et al (2005) The impact of M&a on the R&D process—an empirical analysis of the role of technological- and market-relatedness. Res Policy 34:195–220

  • Chakrabarti AK (1990) Organizational factors in post-acquisition performance. IEEE Trans Eng Manag 37:259–268

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  • Chatterjee S et al (1992) Cultural differences and shareholder value in related mergers: linking equity and human capital. Strateg Manag J 13:319–334

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  • Datta DK, Pinches GE, Narayanan VK (1992) Factors influencing wealth creation from mergers and acquisitions: a meta-analysis. Strateg Manag J 13:67–84

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Homberg, F., Rost, K. & Osterloh, M. Do synergies exist in related acquisitions? A meta-analysis of acquisition studies. Rev Manag Sci 3, 75–116 (2009). https://doi.org/10.1007/s11846-009-0026-5

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Keywords

  • Mergers and acquisitions
  • Meta-analysis
  • Business relatedness
  • Size relatedness
  • Technological relatedness
  • Cultural relatedness
  • Synergies

JEL Classification

  • G34
  • M19