The Impact of M&A on Performance: Alternative Measures of Rates of Profit

15 Pages Posted: 1 Jun 2020

See all articles by Geoff Meeks

Geoff Meeks

University of Cambridge - Judge Business School

Jaqueline Meeks

University of Cambridge - Centre for Development Studies

Date Written: May 3, 2020

Abstract

Previous studies of the impact of M&A on performance have employed a range of measures of “profitability” or “rate of return”. Sometimes they have provided little in the way of rationalization; and sometimes the most appropriate measures have not been deployed for testing the chosen hypothesis, or supporting the final inferences. Here we explore a range of measures, their relation one to another, and caveats to their use in assessing operating efficiency or in monitoring the gains to shareholders. We discuss the profit margin, the return on net assets, the return on equity, earnings per share, and the total shareholder return.

We show that the reported change in margin following M&A will, other things equal, overstate any improvement in operating performance where the M&A increases vertical integration. We analyse the difference between the accounting return on net assets and the accounting return on equity, examining the impact of associated changes in capital structure and/or tax arrangements: we report a consequent tendency for the return on equity (and earnings per share, but not the return on net assets) to overstate any improvement in operating performance after M&A. We describe the difference between the accounting return on equity and the total shareholder return, exploring the impact on the latter of changes in stock market perceptions of the combination’s prospects.

Keywords: M&A, profit rates, performance measures

JEL Classification: G34, L25, L41, M40, M41

Suggested Citation

Meeks, Geoff and Meeks, Jaqueline, The Impact of M&A on Performance: Alternative Measures of Rates of Profit (May 3, 2020). Available at SSRN: https://ssrn.com/abstract=3591642 or http://dx.doi.org/10.2139/ssrn.3591642

Geoff Meeks (Contact Author)

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom
+44 (0) 1223 764226 (Phone)
+44 (0) 1223 339701 (Fax)

Jaqueline Meeks

University of Cambridge - Centre for Development Studies ( email )

7 West Road
2nd floor, Alison Richard Building
Cambridge, CB3 9DT
United Kingdom

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