Corporate takeovertand operational efficiency : do investors believe in value creation through the transfer of operational efficiency between merging firms?

Abstract

In this thesis, we examine the value creation in all-cash public takeovers, the relationship between value creation and the opportunity to transfer operational efficiency, and whether this relationship is different for horizontal and diversifying takeovers. We define value creation as the total increase in shareholder value for the target and the acquirer that can be attributed to the takeover, and opportunity to transfer operational efficiency as the absolute value of the difference in operational efficiency between the target and the acquirer. Operational efficiency is approximated by return on invested capital. The analysis reveals that the average value creation for all-cash public corporate takeovers is positive, which suggests that investors generally believe that corporate takeovers do create value. However, we observe that a substantial number of transactions are, in fact, value-destroying. This finding could suggest that the acquiring management overestimate their ability to create value through corporate takeovers, or that misalignment of incentives cause management to pursue corporate takeovers that do not benefit shareholders. Moreover, the analysis suggests that investors value the opportunity to transfer operational efficiency differently for diversifying takeovers compared with horizontal takeovers, with the association being negative for diversifying takeovers compared with horizontal takeovers. One possible explanation for this is that investors believe that the transfer of a non- industry specific advantage is less probable than an industry-specific one, which can signal that the acquiring management overestimate the potential for transfer of operational efficiency in diversifying takeovers.