ABSTRACT
Mergers and acquisitions (M&A) have been considered as one of the most significant economic events for both individual firms and the economy as a whole. Weston et al. (2004) suggested that M&A create benefits for the economy by helping to move resources from lower value activities to higher value activities. At firm level, M&A may lead to improvement in competitiveness and may facilitate external growth in situations in which internal growth may be difficult and time-consuming. In this regard, Penrose (1959) pointed out that acquisitions relax the managerial constraints and allow higher rates of growth to be achieved. Other arguments put forward by scholars to explain why M&A take place include synergistic gain and market power (see Bradley et al., 1983; Lubatkin, 1983; Porter, 1987; Jensen, 1988; Seth, 1990; Chatterjee, 1992; Sudarsanam, 2003; Copeland et al., 2005). Based on these claims, much research has been done to find out the actual outcomes of M&A. These studies have examined M&A performance from the perspectives of two time horizons, namely short-run performance and long-run performance. Studies examining short-term performance have tended to use share-price information predominantly whereas both share-price information and accounting information have been used to evaluate the long-run performance of merging firms. However, it may be argued that performance evaluation using share-price information may not capture the full picture of merger event. Although share price is an important measure of wealth gain or maximization of shareholder wealth, Sudarsanam (2003) argues that share prices may be influenced by other factors such as market swings, fads and euphoria rather than the company’s expected performance from acquisition strategy. Supporting this line of reasoning, Hirshleifer and Shumway (2003) argue share prices may even be influenced by expected weather condition on the trading day. Despite the various efforts by researchers to control these influences on the share price, there may be a possibility that share-price movements may not fully reflect the underlying performance of the company related to acquisition event (Healy et al., 1992). The stock price reaction to an acquisition can only represent the surprise component of the acquisition rather than the actual synergy effect of acquisition (Fuller et al., 2002). It is therefore not surprising that, a number of scholars have evaluated M&As performance using operating performance measures (see Chatterjee and Meeks, 1996; Sharma and Ho, 2002; Tuch and O’Sullivan, 2007). While a number of studies have been carried out using accounting data to examine operating performance of domestic M&A, only a few studies examine operating performance of cross-border mergers and acquisitions (CBM&A) in the UK context. Prominent among those studies that has used accounting measures to examine long-run performance of CBM&A is that of Moeller and Schlingemann (2005), but it is important to note that the study is in the context of US cross-border acquisitions events. This is against the background that CBM&A activities have become increasingly an important phenomenon in the global market for corporate control. The United Nations Conference on Trade and Development (UNCTAD) database reveals that since 1987, the share of worldwide CBM&A to overall M&A activities is consistently more than 25%. The database also reveals that almost 80% of FDI flows during this period have been carried out through CBM&A. Considering the importance of worldwide CBM&A as a share of FDI flow and the dearth of research in respect of operating performance of CBM&A, this study attempts to fill this gap by using accounting-based measures to evaluate the performance of the UK acquiring firms. This is important because the data from UNCTAD suggest that the UK has been the top acquiring nation in the global market for corporate control for the last two decades. Despite this massive participation, UK has attracted relatively very little attention from the researchers. Almost all the studies that have addressed the long-run performance of UK acquiring firms have used share-price information to evaluate cross-border acquisition performance. The use of accounting information to evaluate the performance of UK acquiring firms engaged in CBM&A in order to find out the other part of the story is a logical step in advancing M&A. The purpose of this chapter is to examine the long-run performance of UK acquiring firms that made acquisitions between 1995 and 2007. Specifically, this study focuses on the following research questions:
What is the long-run operating performance of UK acquiring firms engaged in CBM&A?
What are the factors that determine the long-run operating performance of UK acquiring firms?
We pursue the preceding objectives by using accrual performance indicators and cash-flow performance measures. In addition, this study attempts to assess the impact of various firm-specific and transaction-specific characteristics of acquiring and target firms on the operating performance of acquiring firms.