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Virtual Issue: M&A

During 2010-2017, Financial Management (FM) has published 25 articles focusing on merger and
acquisition (M&A) activity - 10.7% of the total articles FM published during this time period. To focus
my review, I limit myself to examining articles that FM has published on M&A in the last five years.
While some articles in FM on M&A focus on methodology or data issues, the majority focus on
whether M&A creates value for the claimants and in some cases whether M&A creates value to
society. I thus further focus on the articles that examine whether M&A creates value.
When I teach M&A, I emphasize that there are many different motives and theories of whether
mergers and acquisitions create value or not. Broad reasons include: 1.) M&A creates value through
increasing efficiency through operational improvements whereby the buyers increase value by fixing
up mismanaged target firms. 2.) M&A creates value through positive synergies where the two firms
combine to produce new products as in Hoberg and Phillips (2010) or reduce overall costs creating
value for shareholders. 3.) M&A creates value by providing liquidity to sellers wishing to exit from the
private market. 4.) M&A creates value for firms involved but is value reducing for consumers and
society given increased market power. 5.) M&A destroys value by overoptimistic or empire builder
acquirers buying assets that they subsequently run less well. 6.) M&A is a pure transfer that occurs
given either overvalued acquirers or undervalued target firms. No economic gain occurs to the
acquirer or target firm but some economic loss occurs as there are transaction costs associated with
the merger that represent resources that could have been used elsewhere more productively.
Clearly, each of these six explanations have some merit and well-intentioned researchers will
disagree and marshal different facts supporting each motive. It is my attempt with this electronic
survey to give some indication of where FM authors are on this spectrum of whether mergers and
acquisitions create value. Proponents of the first three motives would argue that mergers and
acquisitions create value for the firms involved and create value for society. Proponents of the last
three motives for M&A- market power, agency based, misvaluation based motives - would question
the value of M&A to society.
Upon review, the majority of the articles published by FM in the last five years would contribute to
the view that M&A activity overall creates value. However, the other explanations do find some
support by several articles in FM as my review below will indicate.
Datta, Gruskin and Iskander-Datta (2013) examine LBOs both prior and during the post-purchase
period. They provide a nuanced view: both misvaluation and efficiency increases can help explain
LBOs. First, they show that target firms are undervalued relative to peers at the time of the LBO and
exit with higher valuations. They also show overall that the buyout transaction creates value, as
during the private owned period, the private equity owners undertake value-enhancement measures
including asset restructuring and operational improvements that decrease the cost of goods sold.
While not examining value creation directly, Fürth and Rauch (2015) also focus on buyout funds and
private equity (PE). They show that PE exit strategies are rational and driven by past profitability and
the financial success of the deal.
Fu and Tang (2016) find that the answer to whether acquisitions create value is, like the answer
many good economists give, “it depends.” The results depend on whether the acquirer has short-
maturity debt, which conceptually disciplines management toward only undertaking mergers that
increase value. They find that acquirers with shorter debt maturity realize higher announcement
returns and experience better long-term stock returns and operating performance than other firms.
Their results suggest that short debt maturity improves the efficiency of capital allocation through
better acquisition decisions.
Devos, Krishnamurthy and Narayanan (2016) examine mega-mergers in the banking industry and
ask whether they increase efficiency or market power. Their evidence is mixed. However, again the
final answer is “it depends.” They find that the average megamerger is associated with cost-
efficiency improvements. In the cross-section, efficiency gains are limited to market expansion
mergers, while market overlap mergers and the largest “Too-Big-To-Fail” (TBTF) mergers exhibit
increased market power – thus hurting society.
Chang, Choi and Huang (2015) examine value creation in international M&A and present a puzzle
for subsequent researchers. While they show that poorly governed acquirers transfer wealth to
targets in cross-country acquisitions, they also show that poorly governed US acquirers earn higher
merger announcement returns than their well-governed counterparts. This explanation for this puzzle
is left for subsequent researchers.
While not examining overall value creation, there are several articles in FM that show a very rational
M&A process with profit-maximizing firms. Elkinawy and Offenberg (2013)show that target boards
 give incentives to management that increase value for the target firm shareholders by using
accelerated vesting of management shares that creates alignment with management and target
firms by increasing the likelihood that value increasing transactions go through. Chen, Huang, and
Lin (2016) show that firms learn information about the value of acquisitions from observing
innovative market firms’ acquisitions. Follower firms perform better in their acquisitions when
innovative firms’ acquisition outcomes are favorable. Gogineni and Puthenpurackal (2017) examine
“go-shop” provisions in M&A and whether these provisions entrench target management by allowing
them to potentially ignore favorable offers or whether they add to target value by increasing the price
paid to target firms. Their results indicate that go-shops are effective contractual devices used to
enhance target shareholder value.
I will also briefly note two data and methodological articles published in FM that M&A scholars will
find useful going forward. Mulherin and Simsir (2015) find that in 24.1% of deals, the Security and
Data Corporation (SDC) merger announcement date needs to be adjusted. They provide
corrected initial M&A announcement dates on the FM web site. Borochin (2014) provides a new
methodology using option prices that identifies the market’s beliefs about value creation in M&A.
Subsequent researchers could use this method to see if markets correctly infer subsequent value or
lack-of-value creation in larger samples of firms.
Overall, my review of the recent M&A articles published in FM indicates that FM authors have
contributed in many different ways to our understanding of M&A. Authors have provided better data
and better methods. They have examined outcomes of M&A and what contractual mechanisms by
firms contribute to increased value for acquirers and target firms. They also have shown markets
where mergers may not create value for society given increased concentration – a topic that is
increasingly on the mind of regulators around the world.
All articles cited are from FM except one. It is:
Hoberg, G. and G. Phillips " Product Market Synergies and Competition in Mergers and Acquisitions:
A Text-Based Analysis ," Review of Financial Studies, 2010, 23 3773-3811

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