Do Mergers and Acquisitions Create Shareholder Value

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Do Mergers and Acquisitions Create Shareholder Wealth
In The Pharmaceutical Industry?
Mahmud Hassan, Dilip K. Patro, Howard Tuckman and Xiaoli Wang* Purpose: This paper analyzes mergers and acquisitions (M&A) focusing on the U.S. pharmaceutical industry in the period 1981-2004. This industry is chosen because it is global, engages intensively in M&A which it uses to both complement and substitute for early stage research, and because the potential abnormal returns to blockbuster drugs are substantial. It is our assumption that if abnormal returns to M&A exist in the short and long run, this is the industry to find them. Design: Our study examines short term abnormal returns separating mergers from acquisitions and US-based from foreign-based M&A targets. We examined 405 mergers and acquisitions during 1981-2004 to address the issues of our research. Findings: Evidence of short and long term abnormal returns, as well as accounting and efficiency effects are found for acquisitions but not for mergers, however, our tests do suggest that mergers with US-based targets are not value destroying. We also find differences as to the effects of acquisitions of foreign-based, as opposed to US-based targets. Value: Taken in total our results provide support for the view that, at least in the pharmaceutical industry, acquisitions of US-based companies have a positive impact on wealth creation for company shareholders. Key Words: Pharmaceutical, M&A, Stock Performance

Category: Research Paper

1. Introduction
Whether acquiring company shareholders experience a wealth effect from mergers and acquisitions is a matter of ongoing debate among academic researchers[[i]]. Some argue that mergers and acquisitions (M&A) create synergies that benefit both the acquiring company and the consumers (e.g., Weston, Mitchell and Mulherin, 2004). Others argue that M&A activities create agency problems, resulting in less than optimal returns (e.g., Jensen, 1986). Because the net effects of M&A activity remain unclear, despite a number of studies, a need exists for continued research on this subject. This paper focuses on M&A activity in the pharmaceutical industry because it is global, engages intensively in M&A which it uses as both complement and substitute to early stage research, and because the potential abnormal returns to blockbuster drugs are substantial. If abnormal returns exist, this is a likely industry to experience them. In this section we present the central issue addressed in this paper, section 3 amplifies our reasons for choice of the pharmaceutical industry, and section 4 discusses the data and methodology. Our findings are presented and discussed in Section 5 and conclusions are discussed in Section 6. Writing in 1970, Hogarty reviews fifty years of research and finds no major empirical studies that conclude mergers are more profitable than alternative investments (Hogarty, 1970). Thirty-five years later although we have a better understanding of the causes and consequences of mergers and acquisitions (M&A) activities it is not clear that mergers create positive wealth effects for the acquiring companies. During this period, the literature grew to include studies that range from straightforward event studies looking at abnormal returns before and after mergers to more complex theoretical models involving signaling mechanisms by acquirers through bidding (Fishman (1988)). The evidence indicates that target companies earn significant positive abnormal returns but that the experience of acquiring firms is mixed (Jensen and Ruback (1983), Huang and Walkling (1987)). The motivations for M&A activities, as well as the factors that determine acquirer performance, are also of interest. Traditionally, the literature views M&A activities as value-creating, indicating that the synergies of M&A come from a broad range of sources such as revenue enhancement, cost reduction, access to new products, tax...
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