Impact of Acquisitions on Shareholder Value
The motive behind acquisitions is that they create value for the shareholders. Contrarily, the empirical studies have proved that acquisition does not have a positive impact on the shareholder value. The variance between the acquisition motive and the empirical evidence makes the post-acquisition performance a critical topic of debate. The argument on whether the performance of post-acquisition has negative or positive impacts on stockholders’ value has proved to be controversial. It makes it hard for one to come up with a clear-cut conclusion whether acquisitions can lead to the creation of wealth for the shareholders (Bhagat, Malhotra and Zhu, 2011, p. 22). In the bid to provide an answer to the above puzzle, several studies have employed different approaches to arrive and varied conclusions. For example, Accoutring studies always seek understanding whether acquisitions improve accounting numbers with some studies showing that it improves company’s profitability improvement whiles other studies revealing that acquisitions never register improved performance (Gubbi et al., 2010, p. 45). On the other side, economic and financial studies use event studies that are aimed at understanding how stock returns or share prices of companies are affected by acquisition announcement. The results of such studies show that acquisitions lead to abnormal returns to bidding firms. Nevertheless, the studies show that shareholders may experience negative returns.
Chari et al. (2010, p.88) carried out an analysis, which entailed Merger & Acquisition deals. The study was based on financial dealings from 1986 to 2006. The researchers found out that the acquirers from the industrialized nations acquiring targets of emerging markets get huge 1.16 percent positive returns throughout the 3-day occasion. Nevertheless, this is different for acquirers acquiring firms in non-industrialised countries. The difference comes from the asymmetry between emerging and developed markets. Additionally, the difference is huge when acquired industries occur in industries with the intangible assets.
Even though the studies demonstrate that acquiring shareholders experience negative abnormal returns, some shareholders will benefit eventually from overall gains in the future (Bhagat, Malhotra and Zhu, 2011, p. 23). The contradicting results have forced some authors to claim that the obtained results will always tend to be sensitive to the employed methodology. As a result, it leaves one to doubt whether results reflect the beliefs of the author about the acquisitions. For instance, arguments that returns of long-run equity measure that is used in many studies cannot be relied on. On the other hand, Bhaumik and Selarka (2012) judged that acquisitions are normally overvalued around the time of accumulation with long-run effects being destructive and having little impact on profitability and as a result, they have the meaningless effect of shareholders’ wealth maximization goal.
Alexnadridis et al. (2011) examined acquirer’s shareholder value by using data from different countries. It was realized that competition level is linked negatively with the return of the acquirer and positively linked with the competitiveness of the market, target returns, and target deals completed. It was reported that competitive markets like Canada, the United Kingdom, and the United States experienced a normal premium that aid in acquiring targets in such nations stood at 41 percent as opposed to 31.91 percent in other parts of the world. The results reveal that acquirer loses in the acquisition that is normally confined in the United States, Canada, and the United Kindom whereas, in other markets, the acquirers may gain abnormal returns of 1.56 percent.Atkas et al. (2011, p. 45) carried out an interesting study where they examined behaviour and knowledge of CEO during acquisitions sequence. The United States Chief Executive Officers’ acquirers who had dealt with public targets from 1992- 2007 were analysed. It was concluded that CEOs would always acknowledge signals of the market and modify aggressiveness and beliefs in succeeding acquisitions. The company CEOs reduce or escalate their biding assertiveness in subsequent deals after previous deals favorable or unfavorable market reactions.
Harford et al. (2012) held that gain from acquisition normally depends on target status, payment mode and the partner’s relative size. It is clear that private companies listed acquirers will achieve positive earnings for the period that surrounds the date of the announcement. Such is different from with proof that acquirers do not make gains in the short run. Secondly, acquiring firms’ gains depends on the payment mode. In the case of cash transactions, acquirers gain in private targets case while the acquirers in the listed targets case will break even. For the transactions that involve shares, acquirers will gain huge excess returns in private targets case while they shall lose in listed targets case. Thirdly, relating target size determines the acquirers’ gain.
Humphery‐Jenner et al. (2017, p. 106) claimed that acquisition destroys shareholders’ value at corporate for two reasons. First, shares’ selling price is the book value or even lower in the interest of division higher earnings realization through allocated cost reduction. In case the buyer of shareholders’ stake realizes such, he or she will fail to pay the acquisition premium and might even negotiate to get a discount. Secondly, allocated costs through headcount never disappear but will be reallocated to the different divisions in the firm, and with the firm’s a point of view of value creation; there exists no reason to continue with the transaction. Based on Humphery‐Jenner’s two justifications, there is the incentive of disposing of shares at under 50 ownership percent to measure the equity accounting, not consolidation.In summation, it is evident that both event and accounting based studies are mixed, and do not provide a clear-cut whether acquisitions improve the shareholders’ value. As evidenced in the review, some studies suggest that acquisitions will lead to a shareholders’ wealth creation while others hold that acquisitions do not lead to a shareholders’ wealth creation. So, it is difficult to establish whether acquisitions boost shareholders value with or not. However, many studies are skewed towards the conclusion that acquisition never leads to the creation of wealth for shareholders. Consequently, it is fundamental for the researchers to use effective research methods to examine the impact of the acquisition on shareholders’ value.