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Executive Summary

Various empirical studies indicate that there is a negative abnormal return following a merger or acquisition. However, limited consistent elucidations exist regarding the reason behind the poor performance of many mergers. For this reason, this study assesses the effect of structural factors on the abnormal returns after the merger. Some of the structural factors considered include R&D intensity and market concentration. On addition, the paper looks at the way in which existence of multiple bidders and multiple valuation methods impact on the post-merger performance. The findings show that the value of the entity appreciates in the first three years following the merger through the acquisition of related assets. However, taking part in the merger wave have been found to have a negative effect on merger’s performance. These effects are neutralized over the long period with the performance of post-merger been affected by the intensity of the intangible assets.


A Large share of the mergers tends to be unprofitable ex post with some merger leading to divestitures or reorganization after a short period (Weber and Camerer, 2003). To unearth the reason behind the failure of many mergers, it is important to look at the merger and acquisition motives. Companies opt for the merger to reap some benefits that include research and development improvement, and the creation of financial, marketing, operational and resources synergies (Kummer and Steger, 2008). To reconnoiter the factors that affect the outcome of the merger, this study employs multi-dimensional approach, placing the focus on key valuation and structural factors which make the company opt for the merger. To evaluate the success of the failure of the merger, the abnormal returns of the merged company is examined over a period of time in comparison to that of the market index. For the identified mergers the abnormal returns are calculated and adjusted for the market performance over one, two and three years. This study looks at the sample mergers that are considered horizontal.

The study assesses the effects of the discrepancies in valuation on the performance of the merger, on top of looking at the impact of structural factors. To value the existing difference between various bidders, the study looks the uncertainty of the market value of the firm. To acquire the target company, mainly the acquiring company overvalue the target company. This, therefore, leads to ex post underperformance emanating from the paid premium. The intangible assets such as goodwill may be overvalued resulting to high premium (Sinkovics, Zagelmeyer and Kusstatscher, 2011).

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