Feature article

Identifying the sources of gains from

takeovers
S. Manson, R. Powell, A.W. Stark and H.M. Thomas

I Introduction
In the research literature on UK take-overs there seems to be an appar-
ent conundrum. First, it appears that, in general, the market anticipates
overall equity cash flow gains from a take-over in the sense that the
share price of the acquiree firm typically increases relative to some
appropriately market-adjusted benchmark over the period of time from
the announcement of the take-over to the date when the take-over offer
is declared unconditional while the share price of the acquirer firm does
not decrease over the same period of time1, again relative to some
appropriately market-adjusted benchmark (Franks and Harris, 1989).
Thus, in the view of the market the take-over adds value to the acquiree
and acquirer relative to a scenario whereby the take-over did not take
place. Naturally, if the market is rational in its pricing of the benefits
of take-overs, it must be anticipating cash flow gains of one type or
another.2
Second, another literature exists (for example, Meeks, 1977; Cosh,
Hughes and Singh, 1980; and Cowling, Stoneman, Cubbin, Hall, Dom-

Address for correspondence: Hardy Thomas, Department of Accounting, Finance

and Management, University of Essex, Wivenhoe Park, Colchester, CO4 3SQ, UK.
Tel.: 44 1206 873432, E-mail: hardt얀essex.ac.uk The authors would like to thank
Paul Barnes, Roy Bailey, Nick Collett, Julian Franks, Richard Taffler, Norman
Strong, Martin Walker, Pauline Wong, anonymous referees, seminar participants
at the University of Aberdeen, Finance and Market-based Accounting Research
Conference at University of Manchester, and Institure for Studies in Finance at
University of Essex, Queen’s University of Belfast. Nevertheless, the usual caveat
applies. This study was partially funded by the The Chartered Association of Certi-
fied Accountants (ACCA).
1
There is some evidence of negative share price reactions for the acquirer firm over the
same period but the bulk of the evidence on the acquirer points to a zero reaction in
general.
2
As is probably well known, there is some concern over the rationality of the market’s
assessments of the value creating aspects of mergers. In particular, in the USA, a
literature exists which examines the market performance of acquirers subsequent to the
take-overs and finds that there is some (disputed) evidence of poor performance in this
period (see, for example, Ruback 1988 and Aggrawal, Jaffe and Mandelker 1992 on the
one hand and Langetieg 1978 and Franks, Harris and Titman 1991 on the other).

 Blackwell Publishers Ltd. 2000, 108 Cowley Road, Oxford OX4 1JF, UK and 350 Main Street, Malden,
MA 02148, USA.
320 Manson, Powell, Stark and Thomas

berger and Dutton, 1980) which employs accounting data and concludes
that it is difficult to identify operating gains from take-overs. Naturally,
if specific sources of gains from take-overs are to be investigated, it is
difficult to so do via the use of market data, which aggregates all sources
of gains into a single assessment. The typical strategy adopted by such
studies is to define some measure of operating performance (for example,
operating profit divided by total assets perhaps less an industry bench-
mark for such a measure) and evaluate the size of the change in this
measure from the pre-take-over period to the post-take-over period. If,
on average, the size of this change is not positive across a sample of take-
overs, it is concluded that take-overs do not produce operating gains.
Naturally, such a strategy implies that the appropriate benchmark for
evaluating post-take-over performance is pre-take-over performance.
The apparent conundrum, then, is that if both the market’s assessments
of the average aggregate gains from take-overs and the assessments of
accounting-based studies of operating performance gains are reason-
able, the conclusion that has to be drawn is that the sources of take-
over gains do not relate to operating matters (for example, reducing
capital expenditures whilst maintaining future operating cash flows, or
the use of more efficient financing mechanisms by the acquirer, or tax
loss selling). Although these sources of gains from take-overs are per-
fectly legitimate, such an observation might worry those who view the
market for corporate control as a socially useful mechanism for ensur-
ing that incumbent management teams pursue value-maximising stra-
tegies. If the value of take-overs lies either in the more efficient transfer
of resources from the pockets of tax payers to the shareholders of either
or both of the acquiree and acquirer firms, or in the repackaging of
corporate cash flows, it is not clear where social gains from take-overs
are derived from. Social gains from take-overs are more readily appar-
ent if operating gains occur.3
This study re-examines the question of whether operating gains arise
from UK take-overs using a sample of 44 take-overs drawn from the
period from 1985 to 1987. Using the methodological innovation of
Healy, Palepu and Ruback (1992) and Cornett and Tehranian (1992),
it regresses a cash flow based measure of post-take-over operating per-
formance on an equivalent pre-take-over measure for a proforma ‘mer-
ged’ acquiree and acquirer. The constant term in this regression is inter-
preted as an estimate of the average operating gains from the sample
of take-overs employed. Moreover, the constant term plus regression

3
Even here, of course, apparent gains in operating performance might not be associated
with (first-order) social gains. For example, increases in operating cash flows can be
achieved by using the medium of take-overs to break the power of unions and, hence,
lower wage rates. If no other operating change takes place, it can be argued that this
represents the transfer of wealth rather than a social gain.

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Accounting Forum Vol 24 No 4 December 2000 321

error term for a particular take-over is interpreted as the estimate of

the operating gains from that take-over. These take-over specific
operating gains are then used to explain the market’s assessment of the
total gains from take-overs in a second regression. The constant term
in this second regression is interpreted as an estimate of the gains from
non-operating sources.4
Some initial evidence on the existence of operating gains from UK take-
overs can be found in Manson, Stark and Thomas (1993). Using a simi-
lar methodology to that described above and a sample consisting of 38
of the 44 companies studied here, they suggest that there is evidence
that UK take-overs do produce operating gains. This study extends this
previous study in a number of ways.
First, operating performance is defined in the present study in a wider
variety of ways. In particular, the previous study employed a cash flow
measure of performance based upon the cash flow concepts found in
Lee (1984) and Lawson (1985). Nonetheless, in the UK, Arnold, Clubb,
Manson and Wearing (1991), in like fashion to Bowen, Burgstahler and
Daley (1987) in the USA, suggest that an accruals or funds flow measure
of cash flow can be a better predictor of future operating cash flows.
Thus, this study employs an accrual measure of operating performance
in addition to a cash flow measure. This has the additional virtue of
making this study more comparable with those of Healy, Palepu and
Ruback (1992) and Cornett and Tehranian (1992) who also employ
such a measure.
Second, whereas the previous study only employed an industry-adjusted
measure of operating performance, this study investigates the role of
industry benchmarking in the identification of operating gains from
take-overs. The preferred approach of this study, nonetheless, is to use
industry-adjusted measures of operating performance on grounds simi-
lar to those argued in Healy, Palepu and Ruback (1992). To investigate
the importance of this approach to the measurement of operating per-
formance, however, such performance is measured both ‘raw’ and rela-
tive to an industry benchmark measure of performance.
Third, and perhaps crucially, this study seeks to answer the question of
whether both operating and non-operating gains from take-overs exist for
the sample of UK take-overs investigated. Fourth, this study investigates
the robustness of the measures of the market’s assessments of the antici-
pated aggregate gains from take-overs by investigating the post-take-over
market performance for the sample of take-overs studied.

4
Hayn (1989) provides some evidence from the USA on non-operating tax gains accruing
to shareholders from take-overs using a rather different methodology from the one
adopted here.

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322 Manson, Powell, Stark and Thomas

The remainder of this paper is organised as follows. The next section

describes the methodology adopted, tests to be used and the ways in
which the various variables required by the methodology are measured.
Section 3 describes the sample employed in applying the tests. Section
4 contains the results of the tests. Section 5 investigates the robustness
of the measures of the market’s assessments of the gains from take-
overs upon which this study crucially rests by studying the post-take-
over market performance. Specifically, it considers the post-take-over
performance of the take-overs studied relative to both a pro forma
industry benchmark for stock market performance which constitutes a
weighted average industry performance measure based upon both
acquiree and acquirer industry performance and a straightforward mar-
ket benchmark. The paper concludes with a brief summary of the main
aspects of the study.

II Methodology
The focus of the tests employed in this study is on a scaled measure
of pre- and post-take-over cash flows which proxy for the operating
performance of each take-over. Further, for measures of operating per-
formance before the take-over period, the separate cash flows of the
acquiree and acquirer are added together to create a pro forma ‘merged’
performance measure comparable with the operating performance mea-
sure for the acquirer alone after the take-over.
Cash flows are measured in two different ways. First, pre- and post-
take-over cash flows are measured as pre-depreciation profit adjusted
for changes in working capital (i.e., changes in stocks, trade debtors
and (non-tax) prepayments less changes in creditors and (nontax, non-
interest) accruals). Thus, operating cash flow does not reflect interest
or tax payments and is based upon the operating cash flow concept
found in Lawson (1985). Second, pre- and post-take-over cash flows
are measured simply as pre-depreciation profit. This measure of cash
flow is employed to ensure a degree of comparability with the US studies
of Healy, Palepu and Ruback (1992) and Cornett and Tehranian
(1992).
These measures of cash flow are then scaled by the total market value
of the firm (the sum of the market value of equity plus the book value
of debt plus the book value of preferred stock) at the beginning of the
financial year. In the case of the pre-take-over cash flows, the scaling
device is the sum of the total market values of both the acquiree and
acquirer. In the case of post-take-over cash flows, it is the total market
value of the acquirer reduced by an estimate of the market’s assessment
of the gains that will arise from various forms of net benefits attribu-
table to the take-over.5

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Accounting Forum Vol 24 No 4 December 2000 323

The market’s assessment of the gains from a given take-over is calcu-

lated in the following way. First, the market adjusted change in the
total equity market value of the acquiree between the date five days
before the acquiree was first bid for (not necessarily by the ultimate
acquirer) and the date of the take-over is calculated as one component
of the market’s assessment of the wealth gains from a take-over. Second,
the market adjusted change in the total equity market value of the
acquirer between the date five days before the acquirer first bid for the
acquiree and the date of the take-over is calculated and is the other
component of the market’s assessment of the wealth gains from a take-
over. These two components are added together to create an estimate
of the market’s anticipation of the total gains from the take-over.6,7
Further, with this estimate of the total gains from take-overs, the

5
If such a procedure were not followed, gains from take-overs might be obscured because
the measure of operating performance used has some of the attributes of a capitalisation
rate. Consider the following example. The pre-take-over operating cash flows of the
acquiree and acquirer are 100 and 200 respectively which are expected to continue in
perpetuity. No capital expenditures are required to maintain these operating cash flows
and both acquiree and acquirer live in a utopian world of no taxation. The appropriate
cost of capital for both firms is 10 per cent. Consequently, at the start of their (identical)
financial year, the acquiree is valued by the stock market for 1000 and the acquirer for
2000. Then, a take-over is announced and immediately implemented. The market’s
assessment of the post-take-over operating cash flows (which similarly will need no
additional capital expenditures to maintain them) is that they will be 350 in perpetuity.
The market sees no need to change the cost of capital because of the announced take-
over and, hence, values the acquirer at 3500. If the measure of performance used for the
post-take-over period were not adjusted for the market’s assessment of the gains from
the take-over, the following situation would arise. Post-take-over performance would be
estimated as 350/3500 = 0.1 and pre-take-over performance would be estimated as
(100+200)/(1000+2000) = 0.1. Consequently, no apparent improvement in operating
performance would be shown when, in fact, such an improvement had occurred. If the
market’s assessment of the gains from the take-over is removed from the denominator of
the measure of post-take-over performance, it becomes 350/(3500–500) = 0.1167 and a
gain in operating performance is signalled.
6
Starting the relevant periods five days before any bid allows for the fact that there might
well be a degree of information leakage in the days immediately before any bid.
Nonetheless, if leakage had occurred before this date, the measures employed might well
underestimate the market’s estimate of the wealth gains from the take-over. The market
adjusted change in the total market value of either the acquirer or the acquiree is the
sum of the daily changes in the stock market value of the company reduced by the
opening market value for the day multiplied by one plus the proportional change in the
market index between the appropriate dates. In effect, this procedure treats both acquirer
and acquiree as if they were stocks with a CAPM beta equal to one between the relevant
dates.
7
An alternative version of the market’s assessment of the wealth gains from a given take-
over is calculated as the change in the total market value of the acquiree between the
date five days before the acquiree was first bid for and the date of the take-over plus the
change in the total market value of the acquirer between the date five days before the
acquirer first bid for the acquiree and the date of the take-over. The results from using
these assessments, which affect all of the measures of post-take-over operating
performance, are reported qualitatively in subsequent footnotes.

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324 Manson, Powell, Stark and Thomas

assumption is that any gains to the holders of debt and preferred stock
are immaterial as components of the wealth gains from the take-over.
Returning to the measurement of operating performance, the situation
is complicated, however, by the desirability of measuring operating per-
formance on a multi-period basis because of both the use of (possibly
unsmoothed) cash flows as the measure of performance and the fact
that operating gains from take-overs might only be reflected a number
of years after the take-over. Thus, five years of operating performance
measures are calculated both before and after the year of the take-over
with the year of the take-over itself excluded. Subsequently, the ques-
tion of aggregating each set of five performance measures into a single
summary measure representing either pre- or post-take-over perform-
ance arises. This question is dealt with in two ways. First, the median of
each set of five annual performance measures is employed as a summary
measure. Second, a weighted-average of each set of five annual perform-
ance measures, using relative total market values as weights, is also
used.
So far, the approach employed to estimating ‘raw’ measures of pre- and
post-take-over operating performance has been described. ‘Industry-
adjusted’ measures are also employed, however, as the preferred
approach to measuring operating performance. Starting from either of
the two annual raw cash flow performance measures, two procedures
are employed for this purpose. First, the average equivalent pro forma
estimate of joint industry performance for the year under consideration
is subtracted from the raw measure. The pro forma estimate of joint
industry performance is prepared by identifying the average operating
performance for both the acquiree’s and the acquirer’s industry and
creating a weighted average of these two measures using the relative
total market values of the acquiree and acquirer for the year under
consideration as weights. Naturally, such a process cannot be applied
in the post-take-over period where the total market values of acquiree
and acquirer cannot be identified separately. Therefore, in the post-
take-over period, the weights depend on the relative total market values
of acquiree and acquirer at the start of the year prior to the take-over.8
As a consequence of these procedures, two sets of five annual industry-
adjusted, operating performance measures are created corresponding to
the pre- and post-take-over period. Each set is then summarised by tak-
ing a weighted average of the five annual measures of performance,
using relative total market values as weights, to create one pre- and one
post-take-over estimate of industry-adjusted, operating performance.
Second, a different estimate of joint industry performance for each year

8
This procedure is borrowed from Healy, Palepu and Ruback (1992).

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Accounting Forum Vol 24 No 4 December 2000 325

under consideration is created via the use of median (rather than

average) industry operating performance. Again, two sets of five annual
industry-adjusted estimates of operating performance are calculated.
Then, the median pre- and post-take-over levels of industry adjusted
operating performance are identified to act as summary measures.
As a result of these various approaches to measuring operating perform-
ance, eight different corresponding sets of pre-take-over and post-take-
over operating performance are created.9 These are referred to for take-
over i, as OPij, for j = 1 to 8. Table 1 provides a summary of these
different sets of measures.
Having described the various ways in which pre- and post-take-over
operating performance are measured in this study, attention now turns
to the way in which these estimates are used to, in turn, provide esti-
mates of the operating gains from take-overs. The important issue in
measuring the effects of take-overs on operating performance is the
specification of what performance would have been in the absence of
the take-over. Such a specification serves as a benchmark for evaluating
performance after the take-over. Naturally, such a benchmark is
inherently unobservable.
The main approach adopted here is to adopt the methodological inno-
vation offered by Healy, Palepu and Ruback (1992). Essentially, their
argument is that the element of post-take-over operating performance
that cannot be explained by pre-take-over operating performance can
be attributed to the effects of the take-over. This notion leads them to

Table 1 – Descriptions of operating performance measures OPi,j, j = 1 to 8,

employed in the study

Variable Cash Flow Measure Industry- Summarising

Adjusted Device

OPi,1 Pre-depreciation profits adjusted no average

for short-term accruals
OPi,2 Pre-depreciation profits adjusted no median
for short-term accruals
OPi,3 Pre-depreciation profits no average
OPi,4 Pre-depreciation profits no median
OPi,5 Pre-depreciation profits adjusted yes average
for short-term accruals
OPi,6 Pre-depreciation profits adjusted yes median
for short-term accruals
OPi,7 Pre-depreciation profits yes average
OPi,8 Pre-depreciation profits yes median

9
In effect, Manson, Stark and Tbomas (1993) employed two different versions of OPi,6 in
performing their tests.

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326 Manson, Powell, Stark and Thomas

suggest that an appropriate practice is to estimate the following

regression for operating performance measure j across a cross-section
of take-overs (defining OP(pre)i,j and OP(post)i,j as pre- and post-take-over
operating performance respectively):
OPpost
i,j = ␣j + ␤jOPpre
i,j + ⑀i,j (1)
The estimated impact of the take-over on operating performance for
take-over i when the j’th measure of operating performance is used,
denoted by OGij, is then given by:
OGi,j ⬅ ␣j + ⑀i,j = OPpost
i,j − ␤jOPpre
i,j (2)
Further, if the operational gains from take-overs are treated as a ran-
dom variable, then this treatment, combined with the normal regression
assumptions, suggests that,
E(OGi,j) = ␣j (3)
Thus, the assertion is that the constant term in equation (1) captures
the average operational gains from take-overs and adding the error term
from this regression equation to the estimated constant term provides
a take-over-specific estimate of the operational gains from any parti-
cular take-over. In testing whether the operating gains from take-overs
are, on average, positive, the null hypothesis H0: ␣j = 0 is tested against
the alternative hypothesis HA: ␣j ⬎ 0.
The approach borrowed from Healy, Palepu and Ruback (1992) then
allows the benchmark for post-take-over performance to be a multiple,
constant across the sample of take-overs and estimated from the sample
data, of pre-take-over operating performance. This multiple is, hence,
␤j from equation (1). The approach typically applied in previous
accounting-based studies of operating performance changes arising
from take-overs, however, is to specify a value of one for this multiple
a priori. In order that this study should be comparable with previous
studies, the tests employed also include versions where ␤j is specified
as one in establishing the benchmark for evaluating post-take-over per-
formance. Further, when employing industry-adjusted measures of
operating performance, ␤j is also specified as zero. In this latter case,
the benchmark for post-take-over industry-adjusted performance is, by
implication, also zero.10
These tests can be given an economic interpretation when industry-
adjusted measures of economic performance are used. Consider

10
Note that all of these approaches suffer from the failing that the value of ␤j is common
to all firms. Nonetheless, in the absence of some well-specified way of allowing ␤j ‘to
vary’ across take-overs, it is not clear what can be done that is superior to modelling a
common benchmark multiple.

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Accounting Forum Vol 24 No 4 December 2000 327

operating performance from the point of view of competitive advantage.

If ␤j is set at zero, this can be interpreted as modelling an industry
where competitive advantage and, in particular, superior operating per-
formance (that is, in excess of industry norms) is rapidly competed away
(in particular, within five years). In contrast, if ␤j is set at one, this can
be seen as representing an industry where competitive advantage can be
maintained indefinitely. Such an industry is uncompetitive. Intermediate
values of ␤j reflect imperfectly competitive markets. Given such an
interpretation of the methodology adopted to estimate operating gains
from take-overs, it is not clear, when working with industry-adjusted
estimates of operating performance, which particular value of ␤j should
be used. It is not unreasonable, therefore, to use a number of
approaches, including specifying values a priori.
Having estimated a set of operating gains, OGij, these are employed as
an independent regression variable in explaining the market’s assess-
ment of the wealth gains from take-overs. In this regression, the mar-
ket’s assessment of the wealth gains from a specific take-over is scaled
by the sum of the total market values of the acquiree and acquirer; both
measured at the beginning of the year prior to the take-over. Denoting
this variable by TRi, the following regression is run:
TRi = ␦j + ␾jOGi,j + ␮i,j (4)
If the estimates of operating gains from take-overs carry any economic
substance, it is to be expected that they have some degree of power in
explaining the market’s assessments of the wealth gains from the take-
over. Further, it is to be expected that any relationship is positive. Thus,
it would be a vote of no confidence in the estimates of operating gains
if ␾j ⱕ 0. In addition, the logic of this regression equation is that the
component of the market’s assessment of the wealth gains from a take-
over that cannot be explained by the independent variable (the estimate
of operating gains for that take-over) must be attributable to other
sources of gains (or losses, as the case may be). Therefore, the constant
term in equation (4) represents an estimate of the average non-operating
gains from take-overs. As a consequence, to investigate if there are non-
operational gains from take-overs, the null hypothesis H0: ␦j = 0 is
tested against the alternative hypothesis HA: ␦j ⬎ 0.

III Sample
To derive a suitable sample of take-overs, all take-overs completed in
the period from January 1, 1985 until December 31, 1987 were con-
sidered initially. The date on which the bid becomes unconditional is
defined to be the date of completion of the take-over. The final sample
of take-overs from this initial list includes all take-overs that satisfy the
following conditions:
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328 Manson, Powell, Stark and Thomas

(1) The total market value of the acquiree exceeded £5 million at the
date on which the bid was declared unconditional;
(2) The acquirer and the acquiree are classified by Datastream indus-
trial classification level 5 as UK industrial firms;
(3) The acquirer did not take part in any other significant take-over
activity during the period from which the sample of take-overs is
drawn.11 A significant take-over is defined as one in which the
acquiree is at least one third the size of the acquirer;
(4) Accounting and market value data are available on Datastream
such that the various measures of operating performance and the
market’s assessments of the gains from take-overs can be esti-
mated. It is worth noting that the sample attempts to include as
many of the most recent take-overs as is possible given the data
requirements;
(5) The dates at which (1) the acquiree was first bid for (not necessar-
ily by the ultimate acquirer); (2) the acquirer first bid for the
acquiree; and (3) the take-over took place (i.e., the bid went
unconditional) are available;
(6) Industry data for the construction of industry-adjusted measures
of operating performance are available.
Datastream and Acquisitions Monthly are used to construct the sample.
Acquisitions Monthly is the source of information on (i) when acquirees
are first bid for; (ii) the eventual acquirer first bid for the acquiree; and
(iii) the date at which the bid was declared unconditional. In particular,
a total of 125 industrial take-overs are identified from various issues of
Acquisitions Monthly with the characteristics that they were completed
between January 1, 1985 and December 31, 1987 and the acquiree had
a total market value in excess of £5 million (that is, satisfied criteria
(1) and (2)). Of these 125 take-overs, 43 take-overs are discarded
because the acquirer took part in another significant take-over between
January 1, 1985 and December 31, 1987. Subsequently, 38 take-overs
are discarded from the sample because the necessary data are not avail-
able on Datastream. The final sample, therefore, contains 44 take-overs.
The appendix to this paper contains a list of the take-overs included in
the sample. Also provided are the industrial classifications and relative
total market values of the acquiree to the acquirer.

11
This criterion is used in an approximate way to exclude acquirers who took part in
multiple take-overs around the date of the take-over under examination (although,
perhaps surprisingly, a significant number of take-overs are excluded for this reason).
Naturally, this examination does not preclude the possibility that take-overs included in
the sample will involve acquirers and acquirees who took part in other take-over
activity in the years over which operating performance is measured.

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Accounting Forum Vol 24 No 4 December 2000 329

Some characteristics of the sample are as follows. The ratio of the total
market value of the acquiree to that of the acquirer ranges from a lower
bound of 0.44 per cent to an upper bound of 1168.08 per cent. The
median ratio is 28.21 per cent and average ratio is 95.00 per cent. Based
upon reports in relevant issues of Acquisitions Monthly, 30 of the take-
overs are classified as friendly with the remainder classified as hostile.
Some 25 of the take-overs are between firms in the same industrial
classification. With respect to the spread of the take-overs across the
period from which they were taken, thirteen were completed in 1985,
twenty in 1986, and the remaining eleven in 1987. For acquirees, the
quickest (slowest) time to progress from five days before the initial bid
to the date of completion is 33 (274) days. The average is 71 days. For
acquirers, these statistics are 33 (174) days, with an average of 57 days.
For nine acquirees, the eventual acquirer is not the initial bidder. For
acquirees (acquirers), the weighted average market adjusted gain, when
expressed as a percentage of total market value, attributed to the take-
over is 27.6 per cent (3.1 per cent), with comparable median values of
30.6 per cent (0.1 per cent). Taking acquiree and acquirer together, the
weighted-average (median) market adjusted gain is 8.6 per cent (6.6 per
cent). Using equity valuations as the denominator, the weighted-average
market adjusted gain attributed to the take-over for acquirees
(acquirers) is 34.8 (3.7 per cent). The comparable median values are
46.1 per cent (−0.2 per cent). Again, taking acquiree and acquirer
together, the weighted-average (median) market adjusted gain is 10.4
per cent (8.9 per cent).

IV Results
The results for the various tests described in Section 2 are now pro-
vided. The organisation of this section is as follows. First, the results
of estimating equation (1) using all of the eight different definitions of
operating performance are presented. These results are then examined
for evidence of operating gains attributable to the take-over. Sub-
sequently, results prepared under the assumption that the coefficient of
pre-take-over performance is constrained to equal one (for all measures
of operating performance) and zero (for measures of operating perform-
ance measured relative to an industry benchmark) are presented.
Second, the results of regressing the market’s assessment of the total
gains from each take-over against the various estimates of the operating
gains from each take-over are presented. Of interest here is whether
these results suggest the existence of positive, average, non-operating
gains from take-overs and also if the estimates of operating gains are
able to explain significant amounts of the variation of the market’s
assessment of the total gains from each take-over across the sample.
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330 Manson, Powell, Stark and Thomas

Evidence of operational gains from takeovers

The results of regressing post-take-over operating performance on pre-
take-over operating performance for the eight measures of operating
performance employed in the study are provided in Table 2 below.
The results provide some evidence that operating gains from take-overs
exist. Note that all the constant terms in these estimated equations are
positive and using a one-tailed test, 6 out of the 8 are significant at the
5 per cent level and all are significant at the 10 per cent level. When
considering industry-adjusted measures of performance, it is worth
pointing out that the evidence is stronger for the existence of positive
operating gains from take-overs when medians rather than averages are
used in constructing pre-takeover and post-take-over performance.12,13
Table 2 – Operating gain results

j ␣j ␤j R2

1 0.09 0.44 0.19

(3.03) (3.35)
2 0.06 0.56 0.27
(1.73) (4.08)
3 0.11 0.40 0.04
(2.01) (1.73)
4 0.14 0.30 0.03
(2.90) (1.56)
5 0.02 0.22 0.03
(1.39) (1.53)
6 0.03 0.22 0.01
(2.13) (1.27)
7 0.02 0.13 −0.01
(1.38) (0.66)
8 0.03 0.08 −0.02
(2.31) (0.46)

The results reported are from regressing post-take-over operating performance,

OPpost on pre-take-over operating performance, OPpre. The results are reported for
measures of OPi,j, j = 1 to 8. The sample consists of 44 UK take-overs completed
between 1 January 1985 and 31 December 1987. The constant term ␣j in this
regression is an estimate of the average operating gain from take-overs. The slope
coefficient ␤j is an estimate of the proportion of the post-take-over operating per-
formance that can be determined from pre-take-over operating performance.
OPpost
i,j = ␣j + ␤jOPpre
i,j + ⑀i,j, j = 1 to 8

12
Note that the use of medians is the preferred approach of Healy, Palepu and Ruback
(1992).
13
Nonetheless, one important caveat needs mentioning. It would be unlikely that errors in
variables problems are not present in these regressions. The effect of such problems on
regression coefficients is known in the case where both the independent and dependent
variables are unbiased estimators of the true underlying variables, the errors are normally
distributed and the error terms and the independent variable are all independent. Roughly,
in this case, the estimated regression line is rotated clockwise through the mean values of

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Accounting Forum Vol 24 No 4 December 2000 331

Before passing on, it is worth noting that, based on the evidence

presented in Table 2, the association of pre- and post-take-over per-
formance is weak. It is only when using cash flow measures of perform-
ance unadjusted for an industry benchmark that such a relationship is
revealed. Whether this is caused by the errors in variables problem
referred in footnote 13 or, in fact, is a fundamental attribute of UK
industry is a moot point.
For comparison purposes, Table 3 provides the results of examining the
average size of operating gains when ␤ in equation (1) is constrained to
equal one (when dealing with all operating performance variables) or zero
(when dealing with the performance variables adjusted for an industry
benchmark). It is worth recalling that the typical accounting-based study
of the effect on operating performance of take-overs effectively adopts the
strategy of specifying pre-take-over performance as the benchmark against
which post-take-over performance is to be evaluated (that is, assumed
␤ = one). Thus, the results presented below can provide a useful compari-
son of the effect on the results of the regression-based strategy adopted
in this paper relative to the strategy adopted in previous papers.

Table 3 – Sensitivity of the average operating gains

j OP(post)i,j − OP(pre)i,j t OP(post)i,j t

1 −0.03 −2.43 NA NA
2 −0.04 −3.95 NA NA
3 −0.03 −2.05 NA NA
4 −0.03 −2.50 NA NA
5 0.03 1.55 0.02 1.22
6 0.02 1.02 0.03 2.45
7 0.02 1.35 0.02 1.37
8 0.02 1.15 0.03 2.46

Operating gains are measured as (i) OP(post)i,j − OP(pre)i,j, j = 1 to 8 and

(ii) OP(post)i,j, j = 1 to 8.
The sample consists of 44 UK take-overs completed between 1 January 1985 and
31 December 1987. The operating gains measured in (i) above are comparable to
previous accounting-based studies which in the regression methodology of this
study is the same as constraining the slope coefficient ␤j to one, in the regression
below. The operating gains in (ii) above are measured when the slope coefficient
␤j is constrained to zero, in the regression below.
OPpost
i,j = ␣j + ␤jOPpre
i,j + ⑀i,j, j = 1 to 8.

the underlying independent and dependent variables. If these means were positive, it would
be expected that the constant term be inflated relative to its true value. Consequently, it
can be asserted that it probably would be inadvisable to place too much weight on the
specific values estimated for operating cash flow gains as a proportion of total market
value. Nonetheless, the effect of errors in variables on the t-statistics for the constant term
is not clear and, hence, it is difficult to draw any hard and fast conclusions about the
outcomes of hypothesis tests based upon this t-statistic.

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332 Manson, Powell, Stark and Thomas

The results in Table 3 are not as supportive of the existence of oper-

ational gains from take-overs as those provided in Table 2. In parti-
cular, when the difference between post- and pre-take-over performance
is used to evaluate operating performance gains, the results are negative
when measures of performance unadjusted for industry benchmarks are
employed and positive but only weakly significant when industry-
adjusted measures are used. In particular, with respect to industry-
adjusted measures of performance and using a one-tailed test, two out
of the four estimates of operating gains are significant at the 10 per
cent level.
The results when operating gains are measured by post-take-over indus-
try adjusted performance (␤ = zero), remembering that the outcomes
here can be thought of as representing a model of performance in which
firms rapidly revert to average industry performance norms subsequent
to any departure from them, provide some support for the contention
that take-overs increase operating cash flows. This support does not
depend on the particular way in which cash flows are estimated but,
as when ␤ is estimated using the sample, does depend on whether
medians or averages are used in both identifying industry performance
and summarising pre- and post-take-over performance. That the results
for the case of ␤ is equal to zero are similar to those when ␤ is estimated
from the sample is not entirely surprising given the evidence in Table 2
of the inability of pre-take-over performance to explain post-take-over
performance when performance is measured on an industry-adjusted
basis.
Overall, the results suggest that the evidence for the existence of average
operating gains is strongest when average operating gains are estimated
by the constant term in a regression of post-take-over operating per-
formance on pre-take-over operating performance.14 Naturally, this
places an enhanced importance on the justification for the use of the
regression methodology. Notwithstanding its use by Healy, Palepu and
Ruback (1992) and Cornett and Tehranian (1992), it is not clear why
a benchmark for post-take-over performance of pre-take-over perform-
ance should be more appropriate than some other multiple of pre-take-
over performance when competitive market concerns are introduced.

Evidence of non-operating gains from takeovers

This section considers whether non-operating gains from take-overs can
be identified. Estimating equation (4) for the various measures of

14
When the market’s assessments of the total gains from take-overs are measured without
any form of market adjustment at all, the results are not changed in any substantive,
qualitative way. These results are available from the authors on request.

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Accounting Forum Vol 24 No 4 December 2000 333

operating performance employed and then examining the constant

terms does this. Such an examination takes place, however, in a context
where it would be desirable for the estimates of operating gains to have
some power to explain the market’s assessments of the gains from take-
overs. Thus, the coefficient of estimated operating gains is also exam-
ined. It should be noted initially that the errors in variables problem
discussed above is likely to apply to these regressions as much as to the
previous ones. Table 4 presents the results when operating gains are
estimated from equation (2).
First, the regressions seem to suggest that all of the estimates of
operating gains from take-overs have significant ability to explain the
market’s assessments of the gains from take-overs. This can be seen as
a partial validation of these estimates if it is assumed that the market’s
assessments of such gains are rational and the methods of measuring
such gains employed in this study are reasonable. It is also worth noting
the ability of the estimates of operating gains to explain the market’s
assessment of the gains from take-overs is increased substantially when
operating cash flow is approximated by pre-depreciation profit.

Table 4 – Results of non-operating gains

j ␦j ␾j R2

1 −0.16 4.37 0.30

(−1.39) (4.42)
2 −0.00 4.17 0.22
(−0.00) (3.67)
3 −0.30 4.66 0.55
(−3.27) (7.38)
4 −0.50 5.42 0.59
(−4.68) (7.91)
5 0.18 3.03 0.19
(2.41) (3.29)
6 0.16 2.77 0.16
(2.00) (2.98)
7 0.15 4.80 0.60
(2.74) (8.11)
8 0.08 5.77 0.64
(1.50) (8.72)

The results reported are from regressing the market assessment of the wealth gains
from take-overs, TRi on estimates of operating gains OGi,j, where j = 1 to 8 are the
different measurement bases as defined in Table 1 and operating gain is estimated
as in Table 2. The sample consists of 44 UK take-overs completed between 1 Janu-
ary 1985 and 31 December 1987. The slope coefficient ␾j is an estimate of the part
of the market’s assessment of the total wealth gain, TRi, that can be determined
from operating gains, OGi alone. The part of TRi which is not determined by OGi,
is captured in the constant term, ␦j in the regression and is an estimate of the
average non-operating gain from take-overs. The regression that is estimated is:
TRi = ␦j + ␾jOGi,j + ␮i,j, j = 1 to 8.

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334 Manson, Powell, Stark and Thomas

Whether this is a feature of this sample or a more general result is

not clear.
Second, the evidence on the existence of non-operational gains is mixed.
In particular, when operating performance measures unadjusted for
industry benchmarks are employed, non-operating effects are negative.
When industry-adjusted operating performance measures are used, the
picture is more clearly in favour of the existence of non-operating gains.
Using one-tailed tests, three out of the four estimates of non-operational
gains from take-overs are significant at the 5 per cent level.
This suggests that the use of industry-adjustment plays a key role here.
Certainly, in this context, the use of industry-adjustment in estimating
measures of operating performance is justifiable for two reasons. First,
it can be argued that the market value of a firm in a rational market
takes into account future industry performance in the valuation process.
As a consequence, the current market price controls for future industry
performance and, hence, so should measures of performance. As a spe-
cific example of this type of argument, if an acquiree is in an industry
expected to perform poorly in the medium term and, perhaps, eventu-
ally recover after an industry shakeout, what could create value is
improving the acquiree’s performance relative to the industry and,
hence, preserve the acquiree’s place in the restructured industry. Under
these circumstances, much more knowledge can be gained by the use
of industry benchmarking than without.
Second, the use of the industry-adjustment in the measures of operating
performance renders the regressions of post- on pre-take-over perform-
ance more amenable to economic interpretation. Naturally, given the
dependence of the results concerning the existence of operating gains
from take-overs on the particular methodology used to measure
operating gains, this is an important point.
Next, the results are considered for regressing the market’s assessments
of the gains from take-overs on the estimates of operating gains
resulting from the effective constraining of ␤ in equation (2) to either
equal one (for all measures of operating gains) or zero (for all industry
adjusted measures of operating gains). Table 5 provides the details of
these results.
The results appear to suggest the following. When using the estimates
of operating gains derived by differencing post- and pre-take-over
operating performance, the results are quite strongly in favour of the
existence of non-operating gains from take-overs. The use of estimates
of operating gains based upon post-take-over industry-adjusted
operating performance provide similar support for the existence of non-
operating gains to that provided when operating gains are estimated
using the regression methodology. Finally, it can be observed that, as
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Accounting Forum Vol 24 No 4 December 2000 335

Table 5 – Sensitivity of the average non-operating gains

j ␦j ␾j R2

(i) TRi = ␦j + ␾j(OPpost

i,j − OPpre
i,j ) + ␮i,j, j = 1 to 8

1 0.35 3.76 0.33

(4.88) (4.68)
2 0.38 3.40 0.18
(4.38) (3.25)
3 0.34 3.59 0.37
(4.98) (5.16)
4 0.37 3.98 0.42
(5.49) (5.63)
5 0.18 2.41 0.20
(2.33) (3.43)
6 0.20 2.22 0.15
(2.62) (2.93)
7 0.18 2.68 0.27
(2.46) (4.10)
8 0.18 3.48 0.39
(2.70) (5.36)

(ii) TRi = ␦j + ␾j (OPi,j

post
) + ␮i,j, j = 1 to 8

5 0.20 2.58 0.14

(2.52) (2.80)
6 0.16 2.51 0.13
(1.94) (2.71)
7 0.15 4.86 0.62
(2.85) (8.50)
8 0.08 5.72 0.63
(1.41) (8.57)

The results reported are the average non-operating gains when the operating gains,
OGi,j are measured as (i) OP(post)i,j − OP(pre)i,j, j = 1 to 8 and (ii) when the operating
gains, OGi,j, is measured as OP(post)i,j, j = 1 to 8. The sample consists of 44 UK take-
overs completed between 1 January 1985 and 31 December 1987.

a general rule, the estimates of operating gains based either on the dif-
ference between post- and pre-take-over performance or post-take-over
industry-adjusted operating performance are not as good at explaining
the market’s assessment of the total gains from take-overs as those
based upon the regression methodology.
The above results can be summarised as follows.15 When using indus-
try-adjusted measures of operating performance, on the one hand, if
operating gains are estimated either via the regression methodology or
as post-take-over operating performance, the results provide some evi-
dence that both operating and non-operating gains arise, on average,

15
As in the previous footnote, this overall summary would not be changed if the market’s
assessments of the total gains from take-overs were estimated without any form of
market adjustment. Again, the results are available from the authors on request.

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336 Manson, Powell, Stark and Thomas

from take-overs. On the other hand, when operating gains are measured
as the difference between post- and pre-take-over operating perform-
ance, the results cast doubt on the existence of operating gains on aver-
age from take-overs whereas they strongly support the existence of non-
operating gains. When measures of performance unadjusted for indus-
try performance are employed, however, estimating operating gains via
the use of the regression methodology suggests that average operating
gains might well be positive whereas non-operating gains are negative.
If, in this case, operating gains are estimated by differencing post- and
pre-take-over operating performance, the conclusion is precisely the
opposite.
Which version of the results is accepted will depend upon the reader’s
priors as to the reasonableness of the different specifications of esti-
mates of the operating gains from take-overs and, in particular, the
multiple of pre-take-over performance used to form a benchmark for
evaluating post-take-over operating performance. The preferred
approach in this paper is to use industry-adjusted measures of operating
performance together with the regression methodology for estimating
operating gains. As a consequence, the conclusion reached would be
that some positive evidence exists to suggest that UK take-overs provide
on average both operating and non-operating gains. Nonetheless, the
discussion in the paragraph above suggests that such a conclusion is not
robust to modifications in the methods employed to measure operating
performance and operating gains.

V Post-takeover share price behaviour

The tests mentioned above rely on being able to observe a reasonable
estimate of the gains from take-overs. Unfortunately, a degree of dif-
ficulty is raised here by the somewhat disputed empirical observation
that the share price of acquirers tends to drift downward relative to a
market model benchmark after the acquisition. Certainly, Jensen and
Ruback (1983) and Ruback (1988) appear to accept this post-acqui-
sition downward drift as one of the anomalies surrounding the infor-
mational efficiency of the USA stock markets. Franks, Harris and Tit-
man (1991) suggest that the anomaly disappears on USA data when
more appropriate benchmark portfolios are employed than in previous
studies. Unfortunately, Aggrawal, Jaffe and Mandelker (1992), whilst
replicating the results of Franks, Harris and Titman (1991) over the
time period covered in the latter study, are unable to extend their con-
clusion of no post-acquisition downwards drift to other time periods.
In the UK, Franks and Harris (1989) find similar downwards drift when
post-acquisition returns are measured relative to a market model bench-
mark whereas the drift is upwards if the returns are compared with the
return on the market. Overall, the general conclusion is that the exist-
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Accounting Forum Vol 24 No 4 December 2000 337

ence of post-acquisition downwards drift is still an unresolved problem

concerning the choice of benchmark portfolio against which post-acqui-
sition returns are to be evaluated.
With respect to this general problem, Manson, Stark and Thomas
(1993) argue that the mere existence of this post-acquisition downward
drift is not sufficient to invalidate the tests used above. Essentially, they
argue that if all such drift achieves is a scaling up or down of various
variables in the regression equations then the t-tests employed in evalu-
ating the regression results will not be affected. Nonetheless, this study
takes the opportunity to match the performance of the take-overs in
the sample with two benchmark portfolios.
First, an industry-based benchmark is employed.16 Consistent with the
notion employed in constructing post-take-over operating performance
measures, a joint industry return benchmark is constructed as follows.
The appropriate monthly industry return index for acquiree and
acquirer is identified from Datastream17. A weighted-average of the two
indices is then formed using relative equity corporate market values at
the beginning of the financial year prior to the year of the take-over.
This represents the return index on the joint industry benchmark port-
folio.
Second, the market portfolio is used as a benchmark. Here, the Datas-
tream market return index is used in identifying the monthly returns
on the benchmark market portfolio. The use of the market portfolio as
a benchmark can be justified because (i) its use is consistent with the
way in which the market’s assessments of the gains from take-overs are
estimated; and (ii) the acquirees and acquirers are not concentrated in
any particular industry or set of industries and, hence, taken as a group,
are likely to form a well-diversified portfolio for which the market will
be a reasonable yardstick portfolio.18
The return on the acquirer after the acquisition is calculated in a simple
fashion. Monthly equity total market values for the acquirers are
obtained from Datastream. Monthly returns for each acquirer are esti-

16
Note that Langetieg (1978) has also used an industry return in a three-factor analysis of
post-acquisition acquirer returns. The conclusion of that study is that when industry
performance is controlled for in addition to general market performance, evidence of a
post-acquisition downwards drift in acquirer share price is not so readily apparent.
17
Apart from one industry, industry indices for each of the level 5 industry classifications
used in the study are available on Datastream. For the one exception, a level 4 index is
used. The industry returns indices reflect a dividend yield factor.
18
Note that the recent work of Fama and French (1992) suggests that it is by no means
obvious, firstly, whether the market model is the most suitable way of capturing
expected returns and, secondly, what the most suitable method is. Under the
circumstances, the approaches adopted here seem a reasonable trade-off between
parsimony and insight.

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338 Manson, Powell, Stark and Thomas

mated by dividing an observation of the equity value of the acquirer

by the comparable observation one month earlier. Dividend payments
and new equity issues or retirements are ignored in such a construction
of acquirer returns.
Excess returns for each month then are constructed by subtracting
either the return on the joint industry benchmark or the return on the
market benchmark from the acquirer. These returns are aggregated
across the sample in the following way. First, the date of completion
of the acquisition is referred to as month zero and the excess returns j
months after the date of completion for each acquirer are combined to
form an aggregate return. The returns for each acquirer for each month
after the take-over are combined in one of two ways. First, the excess
returns are added together and divided by the total number of acquirers.
This can be thought of as representing an equally-weighted portfolio
of acquirers. Second, a weighted-average of the excess returns is con-
structed, using relative acquirer equity market values for each month
as weights. Aggregated excess returns for months 4 to 36 after the date
of completion of the take-over are calculated. Months one to three are
ignored to allow the appropriate transactions necessary to implement
the take-over to be completed (in particular, any required equity issues
by the acquirer). Table 6 provides details of the four sets of monthly
aggregate excess returns and their statistical significance.
The results in Table 6 suggest that the number of positive excess returns
exceed the number of negative returns for each time series of excess
returns (and, remember, the monthly acquirer returns ignore dividends
and, hence, are rather conservative estimates). Further, although there
are slightly more significant excess returns than should occur by chance
in two of the time series, there appears to be no economically interpret-
able pattern there. Consequently, Table 6 provides little in the way of
evidence that post-acquisition downward drift exists relative to the
benchmark portfolios employed.19 From this, we conclude that post-
acquisition downward drift is not a serious source of mismeasurement
of the market’s assessments of the total gains from take-overs.

VI Conclusions
This study attempts answers to the following two questions. First, are
there operating gains from UK take-overs on average. Second, are there
non-operating gains from UK take-overs on average. Various measures

19
Naturally, if incorrect benchmark portfolios are used in evaluating post-acquisition
performance, the indicated excess returns in Table 6 will not be meaningful, a risk that
is run when using any benchmarking approach. It is believed that the approaches
adopted here represent reasonable tradeoffs between data parsimony and economic
insight.

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Accounting Forum Vol 24 No 4 December 2000 339

Table 6 – Post-takeover cross-sectionally aggregated excess monthly returns

Month Return t Return t Return t Return t

(i) (ii) (iii) (iv)

4 0.040 2.55* 0.034 2.13* 0.033 2.04* 0.022 1.34

5 −0.015 −1.15 0.013 1.00 −0.009 −0.78 0.023 2.08*
6 0.010 0.86 0.005 0.39 0.016 1.31 0.020 1.66
7 −0.014 −1.32 −0.014 −1.31 −0.006 −0.51 −0.004 −0.36
8 0.009 0.68 −0.017 −1.34 0.002 0.17 −0.021 −1.55
9 0.017 1.43 −0.003 −0.21 0.010 0.76 −0.015 −1.18
10 0.001 0.05 −0.002 −0.14 0.000 0.03 0.014 1.24
11 −0.000 −0.02 −0.022 −2.55* −0.005 −0.58 −0.030 −3.71*
12 0.017 1.49 0.019 1.59 0.014 1.23 0.008 0.65
13 −0.005 −0.51 −0.014 −1.47 −0.010 −1.11 −0.019 −2.19*
14 0.018 1.88 0.019 2.00* 0.013 1.38 0.014 1.44
15 −0.002 −0.16 −0.006 −0.46 0.008 0.60 0.004 0.29
16 −0.002 −0.20 −0.003 −0.32 −0.011 −0.93 −0.007 −0.63
17 0.004 0.33 0.000 0.01 −0.005 −0.39 −0.013 −0.95
18 0.019 0.86 0.000 0.02 0.023 0.94 −0.004 −0.16
19 0.013 1.43 0.002 0.26 0.013 1.26 0.002 0.16
20 0.005 0.57 0.017 1.93 −0.004 −0.35 0.013 1.26
21 −0.001 −0.06 0.001 0.09 0.005 0.63 −0.004 −0.55
22 −0.014 −1.40 −0.025 −2.60* −0.014 −1.24 −0.025 −2.18*
23 0.012 0.79 0.020 1.33 0.003 0.23 0.018 1.20
24 −0.028 −2.54* −0.019 −1.70 −0.028 −2.24* −0.023 −1.84
25 0.002 0.26 0.002 0.22 0.000 0.04 0.001 0.10
26 0.014 1.61 0.010 1.17 0.006 0.63 0.003 0.38
27 0.015 0.82 0.014 0.77 0.018 1.01 0.015 0.83
28 0.001 0.11 −0.009 −0.69 0.003 0.23 −0.003 −0.28
29 0.007 0.42 0.019 1.24 0.004 0.25 0.019 1.26
30 −0.012 −1.23 −0.006 −0.63 −0.009 −0.99 0.003 0.30
31 0.004 0.50 0.004 0.52 0.005 0.60 0.005 0.55
32 0.002 0.28 0.014 1.76 0.003 0.41 0.007 0.92
33 0.001 0.17 −0.004 −0.52 0.003 0.31 0.001 0.14
34 −0.005 −0.51 0.010 1.11 −0.011 −0.95 0.017 1.46
35 −0.004 −0.56 0.006 0.77 −0.003 −0.30 0.004 0.43
36 −0.012 −1.31 −0.006 −0.60 −0.020 −2.10* −0.014 −1.42

*Significant at the 5 per cent level using a two-tailed t test.

The returns are for months 4 to 36 after the takeover. The sample consists of 44
UK takeovers completed between 1 January 1985 and 31 December 1987. Return
(i) is the excess return relative to a joint industry benchmark on an equally weighted
portfolio. Return (ii) is the excess return relative to a joint industry benchmark on
a total market value weighted portfolio. Return (iii) is the excess return relative to
a market benchmark on an equally weighted portfolio. Return (iv) is the excess
return relative to a market benchmark on a total market value weighted portfolio.
The respective t-statistic is also reported.

of operating performance are employed and are combined with a num-

ber of different methods for estimating operating gains from take-overs.
The conclusions reached about the existence of average operating gains
and non-operating gains depend upon the way in which operating per-
formance is measured and the associated way in which operating gains
from take-overs are estimated.
 Blackwell Publishers Ltd. 2000
340 Manson, Powell, Stark and Thomas

If the preferred approach of this study is employed (that is, to measure

operating performance on an industry-adjusted basis and to use a
regression methodology to estimate operating gains from take-overs),
there is some evidence to suggest that both operating and non-operating
gains exist on average for UK take-overs. Nonetheless, this evidence is
not overwhelming. If departures from the preferred approach are
adopted (for example, measuring operating performance unadjusted for
industry norms and/or differencing post- and pre-take-over perform-
ance to produce estimates of operating gains) the conclusions reached
vary from evidence of positive operating gains and no non-operating
gains or, alternatively, no operating gains and positive non-operating
gains.
Given that it is clear that the results are sensitive to the precise details
of how operating performance and associated operating gains are meas-
ured, it also is clear that the conclusion that any reader will draw from
the results presented here might well be different from that drawn by
the authors. Independent of any econometric difficulties that can be
raised with respect to all the approaches adopted here, how to interpret
the results depends upon prior beliefs as to the reasonableness, or other-
wise of the various different approaches employed. If nothing else,
therefore, this paper serves to focus attention on the non-trivial metho-
dological issues involved in measuring pre- and post-take-over
operating performance and combining them to produce estimates of the
operating gains from take-overs.

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342 Manson, Powell, Stark and Thomas

Appendix 1

LISTING OF SAMPLE OF TAKEOVERS

Acquiree Acquiree Acquirer Acquirer Relative
Industry Industry Size

Adams & Motor Dist. BSG Intl. Motor Comp. 15.98%

Gibbons
Debenhams Dept. Stores Burtons Multiple Stores 105.81%
Dunlop Hdgs. Motor Comp. BTR Other Ind. Mat. 13.95%
Eneg. Serv. & Electronics Brammer Misc. Mech. 45.20%
Elec. Eng
Foster Bros. Multiple Stores Sears Hdgs. Multiple Stores 3.24%
Higsons Breweries Boddingtons Breweries 13.68%
Brewery
Initial Laundries & BET Business 36.51%
Clean. Support
Pauls Food Mfg. Harrisons & Conglomerates 33.93%
Cros.
Pearce, C.H. Cont. & Constr. Crest Nicholson Cont. & Constr. 43.22%
Sec. Cent. Hdgs. Sec. & Alarms Automated See. Sec. & Alarms 47.39%
UBM Builders Merch. Norcros Other Ind. Mat. 60.39%
United Parcels Business Bunzl Pack. & Pap. 60.35%
Support
United Wire Other Ind. Mat. Scapa Group Other Ind. Mat. 7.95%
AE Motor Comp. Tumer & Motor Comp. 98.42%
Newall
Automotive Motor Comp. BBA Group Motor Comp. 241.65%
Prod.
Benford Conc. Industrial Plant BM Group Mechanical 399.81%
MA Hand.
Bestobell Misc. Mech. Meggitt Hdgs. Misc. Mech. 1168.08%
Eng. Eng.
Bootham Erg. Misc. Mech. Dowding & Electricals 9.59%
Eng. Mills
Brickhouse Dud. Misc. Metal Glynwed Intl. Misc. Metal 6.66%
Form. Form.
British Vending Food Manuf. GKN Motor Comp. 0.44%
Brown, John Misc. Mech. Trafalgar House Conglomerates 16.67%
Eng.
Clarke, Clement Misc. Boots Multiple Stores 0.72%
(Unclassif.)
Cole Group Electronics Low & Bonar Pack. & Pap. 8.55%
Davenports Breweries Greenall Breweries 12.47%
Brew. Whitley
Distillers Wines & Spirits Guiness Wines & Spirits 270.38%
Home Charm Multiple Stores Ladbroke Leisure 17.62%
Group
Imperial Group Tobacco Hanson Trust Conglomerates 62.77%
Marshalls Univ. Pack. & Pap. British Syphon Conglomerates 82.11%
Martonair Intl. Industrial Plant IMI Misc. Mech. 7.45%
Eng.
Pegler-Hatters Industrial Plant F.H. Tomkins Other Ind. Mat. 398.02%
Roberts, Adlard Builders Merch. Bowater Inds. Pack & Pap. 2.24%
SGB Group Cont. & Constr. John Mowlem Cont. & Constr. 147.86%

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Accounting Forum Vol 24 No 4 December 2000 343

Acquiree Acquiree Acquirer Acquirer Relative

Industry Industry Size

West’s Group Cont. & Constr. Tilbury Group Cont. & Constr. 84.70%
Intl.
Aberdeen Cont. & Constr. Raine Ind. Cont. & Constr. 249.67%
Construction
Babcock Intl. Misc. Mech. FKI Electricals Misc. Mech. 198.30%
Eng. Eng.
Berisfords Misc. Textiles Ferguson Ind. Pack. & Pap. 27.15%
Group
Comb. Eng. Multiple Stores Next Multiple Stores 29.28%
Stores
Equipu Office Equip. Sketchley Laundries & 18.40%
Clean.
Fothergill & Other Ind. Mat. Courtalds General 3.01%
Harvey Chemical
Hillards Food Retailing Tesco Food Retailing 7.20%
Horizon Travel Hotels & Bass Breweries 1.40%
Leisure
Jones, Ernest Multiple Stores Ratners Multiple Stores 23.36%
Lloyd, F.H. Misc. Metal Triplex Lloyd Misc. Metal 90.13%
Form. Form.
Woodhouse & Misc. Metal Johnson, FTH Steel 8.75%
Rix Form. Brown

 Blackwell Publishers Ltd. 2000