The Determinants of Positive Long-Term Performance in Strategic Mergers: Corporate Focus and Cash

44 Pages Posted: 3 Oct 2002

See all articles by Angela Morgan

Angela Morgan

Clemson University - Department of Finance

Lance A. Nail

University of Alabama at Birmingham - Department of Finance, Economics, and Quantitative Methods

William L. Megginson

University of Oklahoma

Date Written: June 2002

Abstract

Using a sample selection and benchmarking methodology designed to more accurately assess merger-related changes in corporate focus, we find a significantly positive relationship between corporate focus and long-term merger performance. We find that focus-decreasing (FD) mergers result in significantly negative long-term performance. On average, FD mergers result in an over 18% loss in stockholder wealth, a 9% loss in firm value, and significant declines in operating cash flows three years after merger. Mergers that either preserve or increase focus (FPI) result in mostly insignificant changes in long-term performance. These results are consistent with prior corporate focus studies, suggesting that existing merger studies finding the opposite result are the result of measurement error. After controlling for other variables related to post-merger performance - method of payment, managerial resistance, and book-to-market ratio - we find that the positive relationship between changes in focus and long-term performance continues to hold. A continuous measure of focus change (DHI) also indicates that the magnitude of focus changes is significant. Every 10% decrease in focus results in a 9% loss in stockholder wealth, a 1+% decline in operating performance, and a 4% discount in firm value. Cash is positively related to long-term performance, but the relationship is significant only for operating performance. Cash-financed FPI mergers exhibit the best and stock-financed FD mergers the worst long-term performance. The negative performance of stock-financed FD mergers is driven by pure conglomerate mergers in the early years of our study. FPI mergers outperform FD mergers in both time periods, but differences are significant only in the earlier years. However, the DHI variable is significant in both time periods, indicating that the magnitude of corporate focus changes is the more important measure of corporate focus or diversification.

Keywords: Corporate focus, Corporate diversification, Mergers, Acquisitions, Post-merger performance

JEL Classification: G14, G34

Suggested Citation

Morgan, Angela and Nail, Lance A. and Megginson, William L., The Determinants of Positive Long-Term Performance in Strategic Mergers: Corporate Focus and Cash (June 2002). Available at SSRN: https://ssrn.com/abstract=321449 or http://dx.doi.org/10.2139/ssrn.321449

Angela Morgan

Clemson University - Department of Finance ( email )

Clemson, SC 29634
United States
(864) 656-2249 (Phone)
(864) 656-3748 (Fax)

Lance A. Nail (Contact Author)

University of Alabama at Birmingham - Department of Finance, Economics, and Quantitative Methods ( email )

Birmingham, AL 35294
United States
205-934-8501 (Phone)
205.975.4427 (Fax)

William L. Megginson

University of Oklahoma ( email )

307 W Brooks, 205A Adams Hall
Norman, OK 73019
United States
(405) 325-2058 (Phone)
(405) 325-1957 (Fax)

HOME PAGE: http://faculty-staff.ou.edu/M/William.L.Megginson-

Register to save articles to
your library

Register

Paper statistics

Downloads
1,623
Abstract Views
6,956
rank
10,032
PlumX Metrics