Measuring the Quality of Mergers and Acquisitions

77 Pages Posted: 29 Jan 2021 Last revised: 16 Aug 2023

See all articles by Atif Ellahie

Atif Ellahie

University of Utah - David Eccles School of Business

Shenje Hshieh

City University of Hong Kong

Feng Zhang

Southern Methodist University (SMU) - Finance Department

Date Written: August 15, 2023

Abstract

We develop a measure of merger and acquisition (M&A) quality using accounting theory. This measure, implied return-on-equity improvement (IRI), quantifies the minimum improvement in the target’s post-acquisition return on equity (ROE) the acquirer must attain to break even on the acquisition price. Employing a large sample of M&As from 1980 to 2018, we find that a high IRI is, on average, less attainable ex post and predicts worse acquirer financial performance. The acquirer’s ROE growth over the first three years after the M&A is 11 percentage points lower for high-IRI M&As compared to low-IRI M&As. Worse high-IRI acquirer performance is observable through higher operating costs, tighter financial constraints, lower investments, and larger and more frequent goodwill impairments. We also find that IRI increases with acquiring CEOs’ overconfidence, incentive misalignment, and difficulty in estimating synergies; IRI decreases with acquirers’ financial discipline and due diligence effort. As such, overestimating synergies and managerial incentives that drive overpayment are potential mechanisms underlying IRI’s negative association with acquirers’ post-M&A performance.

Keywords: mergers and acquisitions, deal quality, post-acquisition performance, overpayment, overestimation of synergies

JEL Classification: M41, G13, G14

Suggested Citation

Ellahie, Atif and Hshieh, Shenje and Zhang, Feng, Measuring the Quality of Mergers and Acquisitions (August 15, 2023). Available at SSRN: https://ssrn.com/abstract=3765106 or http://dx.doi.org/10.2139/ssrn.3765106

Atif Ellahie (Contact Author)

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

Shenje Hshieh

City University of Hong Kong ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Feng Zhang

Southern Methodist University (SMU) - Finance Department ( email )

SMU Cox School of Business
6212 Bishop Blvd
Dallas, TX 75275
United States

HOME PAGE: http://https://sites.google.com/view/fengzhangfin

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