Corporate Acquisitions and Economic Performance.

Abstract

This research investigates economic performance implications of different types of corporate acquisitions. We adopt the perspective that a firm consists of a set of resources whose rent-generating potential is a function of its level of specialization. A corporate acquisition may then be viewed as the purchase of an additional set of resources, which could make a value increasing combination with the acquirer's resources. This would occur when economic gains from the transaction exceed the premium over market value paid for gaining corporate control. The principal issue is, Do acquired firms with related core technologies or market positions show higher abnormal returns at the announcement of the acquisition than unrelated acquired firms? Additionally, are stock returns of acquiring firms similarly affected. Acquisition of complementary technologies could improve product quality or relative cost positions of the combination. It is hypothesized that the pooled technological resources could result in a higher valued combination than the preacquisition value. Similarly, acquisition of a related product market position could provide higher rents through exploitation of a common resource, or from dem and -based advantages. Using published data, it is difficult to assess technology or product market relatedness. Therefore, different classifications of relatedness are used. Salter and Weinhold (1979), classify acquisitions into related (product market positions or technological skills) and unrelated acquisitions. We also use classifications by the Federal Trade Commission (horizontal, product extension, market extension, vertical and unrelated acquisitions). Economic performance is measured by estimating abnormal returns to targets and acquirers associated with the announcement of the acquisition. The abnormal returns reflect changes in the net present value of future earnings associated with the acquisition announcement. The change in the combined value of target and acquirer reflects economic gains (or losses) associated with event. This study consistently finds that related target firms have significantly higher abnormal returns than unrelated targets, using different categorical measures of relatedness. The effects on acquiring firms are not significant. We suggest that this may be due to potential or explicit competition by other bidders, or to low relative size of targets as compared to acquirers.