RESE1118

Foundations
of Scholarship
-

Literature Review
The post-merger performance of firms following a Merger
or Acquisition

Introduction
In a context of globalised economy, the reduced trade barriers and the major
progresses in the fields of logistics and ICT (Information and Communication Technologies)
have made it easier for companies to expand worldwide. Considering the growing business
opportunities that can be found on foreign markets, more and more companies are trying to go
through the process of internationalisation.
In order to achieve international development, firms have to choose among different
expansion strategies : implementation of subsidiaries, partnerships, business alliances, export,
and so on. Cross-border mergers and acquisitions, which consist in acquiring existing
businesses abroad, are part of the different options available. These operations, relying on the
transfer of control rights between two companies, refer to the corporate action of purchasing
the shares or assets of another company in a foreign country (Changqi & Ningling 2010, p
6896). They are characterized by some distinguishing features. Thus, in the case of an
alliance, two or more companies decide to pursue common goals, that are limited and clearly
defined, while seeking to achieve simultaneously some objectives that are specific to each
company. But in the case of a merger, the two companies work to achieve the unified goals of
the new business entity resulting from the operation (Megginson et al. n.d., p. 4). Mergers and
acquisitions can be described as a strategic response of the company to changes that occur in
its environment. They are expected to allow further development of the company, or at least to
help it staying competitive against other businesses. These particular expansion strategies are
often considered as a source of competitive advantage, that can lead to an improvement in the
global performance of a business (Megginson et al. n.d., p. 1). Thus, it is not surprising that,
in 50% of all cases, mergers and acquisitions are the means chosen by companies to expand
the scope of their activities (Kipping 2010, p. 14). In recent years, an unprecedented number
of mergers and acquisitions has been noticed. Given that leading position in terms of
expansion strategies, lots of studies have been conducted about the topic. What makes them
interesting is the divergence of their conclusions. Indeed, while some argue that mergers are a
way to create value, other studies suggest that such operations harm the long-term
performance of the company. And even here, analysing the effects of mergers over the
performance of a business is not an easy thing, as we have to consider them from both the
mergers perspective (i.e. the acquiring companys perspective) and the merging companys
perspective (i.e. the business that has been acquired). Indeed, the literature suggests that a
merger will rarely end up in a perfect success or a complete failure : most often, the benefits
accruing to one company are made to the detriment of the other. Thus, the aim of this
literature review is to understand the motives behind the decision of a merger, from both the
buyers and the targets perspective, and, by comparing different conclusions emerging
from the literature, to provide the reader with a good understanding of the factors that
influence the post-mergers performance.

I - Measure of the post-merger performance

Considering the studies about the post-merger performance of firms, one can notice
that they often come to very different conclusions. The differences that are observed and then
reported by the authors are due, to some extent, to the very specific features of each company,
that make it unique, as we will see later in this literature review. They can also be explained
by the differences in the practices that have been used to measure the performance of the
business before and after the merger.
Measuring the post-merger performance of the new entity, i.e. determining the success or the
failure of the operation, is not an easy task. As stressed by Kipping, the merger destroys the
original frame of reference (Kipping 2010, pp. 15-17). Thus, we are not able to assess any
possible gap with what we would have if the merger has not occured. As highlighted by Amir,
Diamantoudi and Xue, the possible gains resulting from the merger, especially in terms of
efficiency, are difficult to estimate, but rather deductive (Amir et al. 2009, p. 265).
Moreovers, many studies are of little interest as they offer only a limited scope of the impact
of the merger over the performance of both the acquiring and acquired companies. These
studies are criticized by Kipping, who defines them as event studies , as they only consider
the changes in the market shares value immediately before and after the merger took place
(Kipping 2010, p. 15).
Yet, the impact that the merger had on the firms value, whether we are talking about the
acquiring or the acquired one, can be assessed only over the period following the operation, as
it depends on many factors such as the integration process and the reaction of the competitors.
This view is shared by Fancoeur, who states that a period of 3-5 years is required to achieve
the planned synergies resulting from mergers. Indeed, cross-border gatherings between two or
more companies are very complex, so it seems that their drawbacks cannot be fully and
exactly predicted by the financial markets at the moment of their announcement (Francoeur
2005, pp. 97102).
Moreover, listed companies have both tradable and non-tradable shares, and holding the latter
means that you have a control over the company. As the value of non-tradable shares does not
seem exactly related to the market price of tradable shares, the evolution of the stock price
may not be significant while analysing the change of value for shareholders.
So, what criteria to use to determine the success or the failure of a merger ?
Here, different options are available. For example, Zhu and Wang use financial tools, and
consider changes in the ROE (Return On Equity) and the ROA (Returns On Assets) for both
the merger and the merging company. The increase rate of ROA is also used by Changqi
(Changqi & Ningling 2010, p. 1900). Other authors, such as Maa, Whidbee and Wei Zhang
focus on the long-run stock returns, by analysing the continuous dividend yield and the capital
gains yield (Qingzhong et al. n.d., p. 2). On the flip side, Li and Wang, supported by Huang
and Gan, offers an alternative approach to assessing the post-merger performance. Indeed,
they extract a comprehensive performance indicator from several financial indicators
representing different aspects of performance using factor analysis technique (Fu 2010, p.2).
Their approach makes more sense than the simple study of ratios, as it provides a general
overview of the factors influencing corporate performance.

Finally, it must be said that, even if the event-study method commonly used by authors have
many limitations, it is still very useful to understand the reaction of the market following the
announcement of a merger. Thus, it appears that, among the different methods used to assess
the performance of the business, there is not really one that is much better than the others.
Indeed, these different approaches are complementary in order to get a general but precise
enough overview of the way mergers impact the performance of businesses.
II - Post-merger performance of firms
A) The merger and its impact on performance for the acquiring company
Many authors have studied the performance of firms following a merger or
acquisition, and they almost all came to different conclusions. However, over the literature on
that topic, some trends are emerging.
It seems that, for a majority of cases, the merger tends to harm the performance of the
acquiring company. Kipping, providing examples from other studies, states that nearly two
out of three operations of merger between large companies end up in failure (Kipping 2010, p.
19). However, this observation does not apply to mergers occuring between a large company
and one or more SME (Small and Medium Enterprises), which are believed to be generally
more successful.
According to the literature, the return for the shareholders of the merger (the buying
company) is often bad, as pointed out by Kipping (2010, p. 15). Meeks, having studied the
effects of mergers over U.K. firms, came to the same conclusions, noticing a decline in the
profitability of recently merged businesses (1977, cited in Amir et al. 2009). And so did
Ravenscraft and Scherer after they studied many U.S. firms (1987, cited in Amir et al. 2009).
Going against this conclusions, Amir, Diamantoudi and Xue underline the fact that, on
average, mergers do not affect the profitability of the firm. However, they agree to say that, to
some extent, horizontal mergers have a negative impact on sales and market share. Focusing
on the shares price, they noticed, in the period preceding the merger, a substantial rise in share
value, followed by a significant decrease in the first years following the merger (Amir et al.
2009).
Considering the profitability of the firm following a merger, Kimand Sigal notices that these
operations often lead to price increases (1993, cited in Amir et al. 2009).
Thus, it appears that, despite the motives going with them, mergers are not always a good
strategy for the acquiring company. This view is shared by Francoeur who, pointing out the
existence of opposing forces that significantly affect these operations, insists on the difficulty
for businesses to harvest real gains from mergers (Francoeur 2005, pp.97102). On the
contrary, Healy, Palepu and Rubak suggest significant improvements in cash flow operating
returns in the five years following mergers (Healy et al. 1990, p. 19).
The assumption of Deneckere and Davidson, based on the supposed profitability of every
merger, seems unreal, and is not consistent with the evidence coming from many other studies
(1985, cited in Amir et al. 2009). Among the various examples, one could refer to the
merger paradox , stating that, for a merger to be profitable, it should comprise a pre-

merger market share of at least 80% , what does not make sense considering the very basic
principle of a merger (Salant, Switzer and Reynolds, 1983, cited in Amir et al. 2009).
However, determining the consequences of a merger for the acquiring company is not as
simple as a yes/no or good/bad answer.
Thus, it seems more interesting to consider the conclusions, drawn from studies on this
particular topic, as complementary, instead of contradictory. Indeed, we saw earlier that every
company, and so every merger associated with it, is characterized by some very specific
features. Even if some trends emerge, it is important not to generalize too much the results
obtained from the study of one company or another.
In view of this, Francoeur, Ben Amar and Rakoto analyse the effects of mergers depending on
the method used for payment. They report evidence of bad post-merger performance in the
long-term for firms financing the operation with stocks. According to them, stock-for-stock
transactions negatively affect the control capacity of the major shareholders. But, whether the
merger has been financed with cash or stocks, significant negative abnormal returns are
observed (Francoeur et al. 2012 pp. 101-113). This approach contrasts with the results of
Fatemi, who witnessed positive but low cumulative abnormal returns (1984, cited in
Freund et al. 2007, p. 145).
Views also differ regarding the evolution of the firms value after a merger. Spported by
Dougas and Kan (2004), Lang and Stulz (1994) think that a merger with an unrelated target
(from another industry) leads to a decrease in the firms value (cited in Freund et al. 2007, p.
145). Their view is shared by other authors, such as Qingzhong, Whidbee and Zhang
(Qingzhong et al. n.d., p.2), but also Fu (2010 pp. 1-6). On the flip side, Campa and Kedia
(2002), supported by Villalonga (2004), but also Klein and Saidenberg (2005, cited in
Hagendorff & Keasey 2009, p. 5) found that, on average, the value of the firm is not
negatively impacted by diversification (cited in Freund et al. 2007, p. 145). A synthesis of
both approaches can be found in the work of Dos Santos, Errunza and Miller, who state that,
while a merger with a related target will not harm the value, an industrial diversification often
cause value discounts (Santos et al. n.d, pp. 1-3).
From my perspective, the cross-analysis of these different studies emphasizes the fact that,
even if mergers are usually believed to improve firms performance, in reality, such operations
often end up with a destruction of value for the shareholders of the acquiring firm.
B) The post-merger performance from the target companys perspective
From the target companys perspective, the effects of the merger are not the same.
Indeed, while such operation is believed to harm the shareholders income and the financial
performance of the buying company, it seems to have a positive impact on the value of the
target company.
Thus, for Kipping, it is the acquired companies that mainly rip the benefits from the merger,
as they receive inputs in terms of know-how and technology, as the result of a transfer of
assets (Kipping 2010, p. 15). The offshoring of some of the operations to the headquarters of
the acquiring company may also improve the efficiency of the acquired business.
Here most authors point out the usually good post-merger performance of the merging
companies (i.e., those which expand the scope of business of the merger ). Among them,

Francoeur, Ben Amar and Rakoto, supported by Kruse, Park, Park and Suzuki (Kruse et al.
2007), who notice that, while shareholders of the buying company most often obtain nil or
negative abnormal returns on the long term, the owners of the merging firm generally increase
their wealth (Francoeur et al. 2012, p. 101).
As stated by Healy, Palepu and Rubak, mergers, through the transfer of knowledge, knowhow and technology that they imply, result in a significant improvement in asset
productivity for the acquired company. This leads to an increase in the operating cash flow
returns after the merger (Healy et al. 1990, p. 2). Moreover, synergies resulting from the
operation can, by favouring productivity and efficiency, increase the equity value of the
acquired business.
An interesting contradictory analysis comes from Mueller, who observed that, even if some
mergers seemed profitable, the acquired companies later experienced a drop in their sales. He
also stressed out the negative impact of the merger over the market shares of the merging
companies (1985, cited in Amir et al. 2009). But he failed to take into account the fact that, at
least on the short-term, the merger will benefit to shareholders of the merged business as they
will receive a premium for selling their shares to the acquiring company.
This leads us to analyse the motives that stand behind the merger, and the determinants of the
post-merger performance.
III - Differences, motives and determinants of the post-merger performance
A) Differences, motives and their impact on the post-merger performance
First, it is important to understand that companies, due to different goals and different
specific features, will not achieve the same performance, regarding a situation of merger with
another company.
Thus, it is crucial to understand the motives that hide behind the decision of a merger. White,
considering the banking industry, where mergers and acquisitions are very common, suggests
that such operations are often motivated by growing pressures to increase efficiency (1998,
cited in Hagendorff & Keasey 2009, p. 2). Hagendorff and Keasey develops this argument by
highlighting two main strategies that use to motivate a merger : to cut costs (e.g. by
economizing on labour costs or branch networks) and to increase revenue . Their view is
shared by Berger and their argument supported by some evidence from the European and US
banking industries, respectively implementing a post-merger cost-cutting strategy, and a
revenue-enhancement strategy (1999, cited in Hagendorff & Keasey 2009 p. 2-5).
However, even if interesting, this proposal is incomplete, as it does not provide a general
overview of the motives behind a merger, that can be achieved through different strategies and
with different objectives, such as raising market power, responding to industry deregulation
or technological progress, or averting distress (Berger et al., 1998 ; Biker and Haaf, 2002 ;
Berger and Mester, 2003 cited in Hagendorff & Keasey 2009, p. 5).
Another interesting study comes from Markides and Oyon. Describing the internationalisation
process, they suggest that firms expand worldwide in order to fully exploit their specific
assets, that include technological skills, brands and reputation, quality of the management
team and experience on foreign markets. According to them, the development of the

companys knowledge over global markets could significantly improve the performance of the
company (2005, cited in Francoeur 2005, p. 99). Their view is shared by Kang and Johansson,
who bring forward geographical diversification and acquisition of complementary assets as a
means to increase performance and compete efficiently against other companies from the
same industry (Francoeur 2005, p. 99). Last, to the aforementioned motives, Changqi adds the
pressure of competitors from the home market, the quest for specific resources and the
positive role played by government policy measures (Changqi & Ningling 2010 p. 6897).
Furthermore, Changqi raises an important point as he considers the influence of the
competitive and comparative advantages of buying companies over the performance of the
merger, such as the corporate governance, the learning ability, etc... (Changqi & Ningling
2010 p. 6896). Here, one can see a major limitation to the other studies mentioned above, as
they only consider the differences of motives to justify the differences of post-merger
performance between companies.
From that perspective, it seems interesting to focus on the factors influencing the post-merger
performance.
B) Determinants of the post-merger performance
Jemison and Sitkin suggest that the outcome resulting from mergers depends on three
elements : the complementarities between the firms involved (strategic fit), the degree of
compatibility in management systems and culture (organizational fit), and the development of
the acquisition process (Bernad et al. 2010, pp. 284-85).
Strategic fit is defined as the degree to which a target firm augments or complements the
parents strategy and thus makes identifiable contributions to the financial and non-financial
goals of the parent (cited in Bernad et al. 2010, pp. 284-85). It can be linked to the concept
of synergies, as it might help in achieving a reduction of the costs through economies of scale
and scope. The organizational fit describes the match between administrative practices,
cultural practices, and [personal] characteristics of the target and parent firms (cited in
Bernad et al. 2010, pp. 284-85). The compatibility of the firms appears as a major determinant
of the post-merger performance, as it will impact the integration process and the possible
disruptions within it. Synergies are seen by many authors as the key factor for a successful
merger, especially when the firms have most of their assets relying on knowledge, as
underlined by Francoeur (Francoeur 2005, pp. 99-103).
Thus, among all the determinants, visible or not, that influence the firms post-merger
performance, Cyert and March put a particular emphasis on the previous experiences of the
company, which include the previous experience of the management team (2001, cited in
Changqi & Ningling 2010, p. 1900).
When it comes to the decision about making the merger or not, the acquiring company has to
consider its differences compared to the target company, in terms of language, culture,
management habits and regulations, but also in terms of social and political differences.
Failure to do so means that coordinating the two companies and monitoring the managers in
the acquired firm might be very difficult and costly. This view is shared by Freund, Trahan
and Vasudevan (Freund et al. 2007, pp. 143-44), and can be enriched by the study of Very,
Lubatkin, Calori and Veiga. Indeed, refering to the work of Lorsch (1986) and the analysis

made by Hambrick and Cannella (1993), they state that the post-merger performance of
merged firms is influenced by perceptions of cultural compatibility, removal of autonomy and
the relative size of the firm (Very et al. 1997, p. 593).
But one of the most important determinants of the post-merger performance comes from the
acquiring and the acquired companies themselves : their pre-merger performance. Indeed,
Changqi points out that, from the acquirers perspective, the pre-acquisition performance of
the acquitting firm is positively related to its acquisition performance . He establishes the
existence of a positive link between the Tobin Q value of the acquiring firm (that reflects its
ante-acquisition performance and management capacity) and the shareholders interests. And
from the target companys perspective, Changqi, supported by the market for corporate
control theory, argues that the difference between the market value and the actual value of the
firm determines whether a firm will be acquired (Changqi & Ningling 2010, p. 6898).
Conclusion
The aim of this literature review was to determine the factors influencing the postmerger performance, in order to understand why mergers are successful, or why they end up
in failure. This was made through the analysis of various studies, that sometimes came to very
different conclusions. Precisely, it is this multiplicity of interpretations that makes the study of
mergers sound interesting. Despite this variety of approaches, one can see a major limitation
to the studies we have focused on. Indeed, it is only mergers between large firms that are
analysed, while in reality, the majority of cross-border mergers involve one or more SMEs
(Small and Medium Enterprises). Moreover, most of the papers studied do not take
sufficiently into consideration the differences of industry and strategy as determinants of the
post-merger performance.
However, this literature review has also its own limitations. Indeed, it does not consider the
role played by managers regarding the decision of a merger, and the significant impact that it
may have on the post-merger long-term performance. This is a choice I had to make, as there
is so much to say on that topic, that it would require a whole review to cover it. What would
definetely be interesting, given the divergent conclusions also found on the subject.
Finally, what emerges from this paper is the need to develop new ways of measuring the
success or the failure of an alliance. Indeed, should we base our judgement only on financial
performance ? Or are the duration, the quality of the collaboration and the achievement of
specific objectives better indicators of the post-merger performance ?
This makes me say that there is still room for further research on the topic.

References

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