Applied Mergers and Acquisitions. Robert F. Bruner

       Dennis Mueller (1979). In testimony before the U.S. Senate, Mueller said, “And the predominant conclusion, what it comes to, from looking at this literature, is that the firms themselves are performing no better on average than they would have been in the absence of the mergers, and the stockholders who hold shares in those firms are doing no better than if they had shares in a firm that wasn’t.”¹⁵

        Michael Jensen and Richard Ruback (1983). Based on an analysis of 16 studies, the authors concluded that the return to bidders in successful mergers was zero, and in successful takeovers was +4.0 percent. They wrote, “The evidence indicates that corporate takeovers generate positive gains, that target firm shareholders benefit, and that bidding firm shareholders do not lose.”¹⁶

       Murray Weidenbaum and Stephen Vogt (1987). Based on an analysis of 10 studies, the authors wrote, “We conclude that, based on historical data, negative returns to shareholders for acquisitions are more prevalent than the prevailing folklore on the subject admits. Clearly, there are winners and losers in the takeover game. Most studies confirm that, in general, target firm shareholders are winners. The evidence presented here indicates that, on average, acquiring firm shareholders are not as fortunate. At best, these shareholders are no worse off, but often they lose during acquisitions.”¹⁷

       Richard Caves (1989). The author referenced 69 studies and considered the market-based share returns at the announcement of the deals and the performance in the years following merger. He concluded, “We have a conundrum. Ex ante, mergers appear to create value for bidder and target together that is substantial relative to the premerger worth of the target firm. That is, the financial markets appear to believe that bidders can wring a lot more value from the typical target’s assets. Ex post, recent studies run exactly in the opposite direction, indicating that mergers not merely fail to warrant acquisition premia but actually reduce the real profitability of acquired business units, increase the intraindustry dispersion of plant productivity levels, and shrivel the acquiree’s market share.”¹⁸

       Deepak Datta, George Pinches, and V. K. Narayanan (1992). The authors considered 41 studies, and concluded that bidders earn a return of less than one-half of 1 percent. They wrote, “The synthesis of ex ante event studies presented in this paper provides robust evidence that, on average, shareholders of bidding or acquiring firms do not realize significant returns from mergers and acquisitions.”¹⁹

       Does pay. This answer is certainly justified for shareholders of target firms. Also, studies of targets and buyers combined suggest these transactions create joint value. Finally, for bidders alone, two-thirds of the studies conclude that value is conserved or created.

       Doesn’t pay. This is true if you focus only on bidders, and define “pay” as creating material and significant abnormal value—this line of reasoning is behind statements that 60 to 70 percent of all M&A transactions “fail.” But economics teaches that investors should be satisfied if they earn returns just equal to their cost of the lost opportunity (i.e., their required return). Therefore, the popular definition of failure is extreme. The reality is that 60 to 70 percent of all M&A transactions are associated with financial performance that at least compensates investors for their opportunity cost—against this standard it appears that buyers typically get at least what they deserve.

        It depends. This is true, from the perspective of the earlier section that describes determinants of higher and lower M&A profitability. Value is created by focus, relatedness, and adherence to strategy. Diversification (especially conglomerate), size maximization, empire building, and hubris destroy value. The implication of this is that good deals are not achieved by pricing alone: Strategy and skills of postmerger integration matter immensely. Some rich insights can be derived from an examination of types of deals. The key implication of these insights is that managers can make choices that materially influence the profitability of M&A. Cleverness gets its due. So does stupidity.

       We don’t know. This is true from the perspective of the earlier section that discusses how research strictly rejects null hypotheses, and never confirms alternative hypotheses. One can only test for the association of M&A with profitability, never causation. Like intellectual tic-tac-toe, you prove anything only by eliminating all the alternatives. Even after many studies, we may not have exhausted the alternative explanations. It is hard to warm up to this view. While one admires its rigor and skepticism, surely the mass of tests tells us at least something about tendencies.

       All the above. This is apparently true. Each of the preceding positions has at least one leg (if not two) to stand on. While this position may be honest, this alternative gives equal weight to the various arguments, and is not very satisfying to the practical person who must decide. You must have a view.

       None of the above. Perhaps the cacophony of conflicting studies leads one to pure agnosticism. Such a conclusion is harsh, and hardly the foundation for an executive who must lead an enterprise in the hurly-burly of business life.