The Effect of an Acquirer’s Life Cycle Stage on the Performance of M&As: Evidence from Mega and Non-Mega Deals in the US

Abstract

A substantial body of academic literature continues to investigate whether M&A deals create or destroy shareholder value and what are the main determinants of M&A performance, but the results are still inconclusive. In this paper, we investigate the impact of corporate life cycle on M&A performance from the perspective of acquiring firms.

We shed additional light on the performance of M&A deals from the perspective of bidders’ life cycle stages and the deal size . We single out mega deals, where activity remains upbeat, and compare their effects on M&A performance with the effect of non-mega transactions. In contrast to previous studies in the area, we identify four life cycle stages (introduction, growth, maturity and decline), whereas the existing literature mostly focuses on three life cycle stages.

Our sample includes 2413 US domestic M&A deals from 2003 to 2017, and consists of 386 mega deals and 2027 non-mega transactions. The data for analysis were obtained from Capital IQ, Bloomberg and Thomson Reuters Eikon databases.

Based on the event study method and regression analysis, we find that stock market reaction is positive for M&A deals in the US and this reaction is more favorable for non-mega acquisitions than for mega M&A deals. We show that non-mega deals outperform mega transactions for acquirers at the introduction and growth stages of the business life cycle. Our results also indicate that benefits for shareholders from acquiring firms decrease on average with the life-cycle of an organisation, but the returns for shareholders are positive in both cases. By contrast, in mega deals, shareholders receive negative returns when the acquiring firm is at introductory life cycle stage.

The scientific novelty of this paper is reflected in our contribution and expansion of the scope of research in this field. There is a relative scarcity of analysis examining M&A deals from the perspective of life cycle stage, and our addition of a fourth category of analysis in this area, along with a focus on the value of the deal, expands the range of methodology for future research. This research is open to further expansion in different markets and our methodology is readily adaptable for the addition of further analytical variables. Importantly, with the validation of our research hypotheses and the confirmation of significant results, we provide a useful new tool for managers and professionals engaged in M&A deals to actively gauge and forecast practical implications of their deals.

Keywords: Mergers and Acquisitions, Value Creation, Life Cycle of Organisation (LCO), Life Cycle Stage, Mega Deals

JEL Classification: G34, G14