The effect of full takeovers on corporate performance : Australian evidence over the last two decades

Abstract

This thesis investigates whether corporate takeovers create value and examines the effect of full takeovers on the financial performance of the combined firm in the post-takeover period. A sample of 95 Australian takeovers over a twenty-two year period between 1979 and 2000 was employed. The sample was made up of Australian publicly listed industrial firms. Bidder firms that are private or foreign were excluded. In addition, firms in sectors other than industrials were not included because of noncomparability of accounting methods. Nine performance measures were used and comprised of six financial performance measures: three profitability (accrual) measures as well as three operating cash flow measures, one asset turnover measure and two debt/financial leverage measures. These nine performance measures used are (1) Return on assets, (2) Return on equity, (3) Earnings before interest and tax profit margin, 4) Operating cash flow on total assets, (5) Operating cash flow on sales, (6) Operating cash flow on total equity, (7) Asset turnover, (8) Total liabilities on total assets and (9) Total liabilities on total equity. A five year window on either side of the event year was used to examine any changes for each of the nine post-takeover performance measures. A method similar to that used by Healy, Palepu and Ruback (1992) was undertaken, where industry benchmarks was used to control for market-wide and industry-specific effects. For each of the nine performance measures, industry adjusted figures were calculated by subtracting the industry benchmarks from the combined firm performance both in the post and pre-takeover periods. Differences between the post- and pre- takeover industry adjusted performance measures based on the change model were analysed. Several extended cross-sectional regression analysis was performed as the regression model factored in any persistence in the pre-takeover performance measure. Explanatory variables used in the regression models include (i) the relative size of the acquisition; (ii) the method of financing; (iii) the degree of industry relatedness for the takeover; and (iv the degree of takeover hostility. Similar findings are reported by both the change and regression models; in that financial performance measures showed declines in the post-takeover period. The size of the acquisition and stock financing had a positive correlation with all six financial performance measures in the post-takeover period, however an inverse relationship was found for hostile takeovers. Based on the empirical evidence presented in this thesis, it appears that corporate takeovers in Australia do not lead to improved financial performance. The results of this thesis is not consistent with the synergy hypothesis, but is interpreted as providing support for the agency and the hubris hypotheses.

Date of Award	2006
Original language	English