How Different is the Long-Run Performance of Mergers in the Telecommunications Industry?

Abstract

Using a sample of telecommunications mergers during the 1990-1994 period, we find that acquiring firms underperform relative to their size and industry matched control firms. The annual cumulative abnormal returns (CARs) to these firms are significantly negative for five years following the merger. Shareholders of the acquiring firm suffer a wealth loss of nearly 20% over the five-year post-merger period. We obtain similar results from three- and five-year holding period returns (HPRs). Our findings are consistent with those reported by earlier studies and indicates that regulated industries also experience post-merger underperformance. We do find however upon disaggregation of the sample that larger mergers exhibit positive long-run performance while the mid-size and smaller mergers underperform relative to their control firms. We further observe that conglomerate mergers demonstrate superior long-run performance while that for non-conglomerate mergers is consistent with the aggregate sample findings and suggests significant underperformance.

JEL Classification: G30, G34, K23