Monday, December 7, 2009
The bigger and more complicated the deal, the more likely it is to fail. Sometimes empire building and confusing luck for ability result in disastrous decisions. This definitely comports with one’s ex ante sense of how things should work. AOL-TimeWarner is the obvious example. Bayazitova, Kahl and Valkanov have a new paper, Which Mergers Destroy Value? Only Mega-Mergers, that confirms this thinking.
Abstract: We argue that the transaction size determines which mergers create and which destroy value. In particular, mega-mergers, the top 1% of mergers in terms of absolute transaction value, destroy value, while non-mega-mergers create value. Mega-mergers are particularly important, because 43% of all money spent on acquisitions is spent on mega-mergers. Average acquirer short-term announcement returns are strongly negative (-3.2%) in mega-mergers but positive (1.5%) in non-mega-mergers. This result is robust to the known determinants of acquirer announcement returns, including acquirer size and the target’s public status. Using three different approaches, we show that for both mega- and non-mega-mergers, the acquirer returns are directly due to the merger and not due to a revaluation of the acquirer’s stand-alone value. We find evidence that mega-mergers are driven by managerial motives and weak corporate governance. We conclude that most mergers are driven by value-maximizing motives, but mega-mergers are driven by managerial objectives or hubris.