Post-Merger Corporate Performance in Japan

Abstract

The issue of choice between specialization and diversification in corporate business activity has become the center of large body of corporate finance literature in recent years. U.S. empirical evidence on the effects of diversification after merger is mixed, suggesting that the diversification benefits of mergers change over time. This is the first paper to examine the long-term operating performance following mergers of manufacturing firms traded on the Tokyo Stock Exchange for the period from 1969 to 1992. Using a unique data set that includes the pre-merger performance of the target and acquirer firms, we find that the long-term operating performance following the mergers is positive but insignificant. However, the long-term performance is significantly greater following diversifying mergers, and there is a remarkable degree of consistency between the pre-merger and post-merger performance. Our results are consistent with the view by Hubbard and Palia (1999) who examine the mergers occurring in the U.S. during the 1960s, and find the positive abnormal returns in bidder firms of diversifying mergers. Finally, we show that rescue mergers involving distressed targets are not likely to lead to inferior long-term performance contrary to the notion that acquisitions of poorly performing firms are less likely to succeed. This is a contrast to the results of Clark and Ofek (1994) who examine a sample of 38 of acquisitions of distressed targets in the U.S. and report that the bidders are not successful in restructuring the target firms. Our findings support the notion that the benefits of merger will be greater when target firms is liquidity constrained prior to diversifying acquisitions.

Keywords: Diversification; Post-Merger Performance; Japanese Keiretsu

JEL Classification: G32, G34