Introduction
A majority of corporate mergers fail. Failure occurs, on average, in every sense: acquiring firm stock prices tend to slightly fall when mergers are announced; many acquired companies are later sold off; and profitability of the acquired firm is lower after the merger
(relative to comparable nonmerged firms).1 Participants report a lot of conflict during the merger, resulting in high turnover (Buono et al. 1985, Walsh
1 The most conclusive evidence of lower postmerger profitability comes from studies by Ravenscraft and Scherer (1987, 1989).
They use Federal Trade Commission line-of-business data to compare companies’ lines of business after they were acquired with a proxy for what their performance would have been without the merger (using comparable control businesses). Operating income as a percentage of assets is lower by 0.03 for the merged target businesses. This is a substantial (and statistically significant) drop because their pretakeover operating income/asset ratio averaged
0.115. Also, McGuckin et al. (1995) provide support for the hypothesis that mergers and acquisitions fail on average, even though their overall interpretation is the opposite (but not clearly supported by their analysis). Specifically, they find that acquisitions decrease productivity and employment at the firm level (even though acquiring firms were highly productive before the acquisition) and this is similarly supported in their initial plant-level analysis. They manage to overturn the productivity result at the plant level only for a subset of plants (those belonging to larger firms).
1988).2 Participants express disappointment in the mergers’ results, and surprise at how disappointed they are. Curiously,