An analysis of mergers and acquisitions during the recent merger wave in Scandinavia

Bjarke Nielsen & Peter Bierregaard

Student thesis: Master thesis


This thesis focuses on the performance of mergers and acquisitions during the recent Scandinavian merger wave. The number of acquisitions fluctuates over time, and it is interesting that empirical studies find a considerable number of acquisitions struggling to create value. This fact motivates the focus on the motives behind the value decreasing acquisitions from an agency and behavioral perspective. Hence, the thesis examines how agency theory and behavioral economics can explain underperforming acquisitions, and seeks to set up a number of recommendations that can be used proactively to prevent these. The thesis develops theoretical arguments for value destroying motives which bases the ground for eight hypotheses. Related to agency theory, M&A motivated by empire building, managerial risk aversion, managerial entrenchment and private benefits of control have a direct theoretical effect on merger performance. Likewise, hypotheses are set up for herd behavior/anchoring, overconfidence, the confirmation trap and escalation of commitment which all are value decreasing motives founded in behavioral economics. A sample of 579 Scandinavian acquisitions is examined. The acquisitions were completed within the period of 2001-2006 and it covers the trough and peak period of the recent merger wave. Through an operating performance analysis it is evident that 49.57 % of the mergers underperform compared to their peers. The hypotheses of empire building, managerial risk aversion and overconfidence can be accepted to have a significant negative impact on performance. Herd behavior and anchoring is evident in the fact that mergers completed in 2006 underperform, but this motive cannot be supported by other proxies. The empirical study allows the set-up of multiple recommendations to minimize the risk of acquisitions based on value decreasing motives. Classic corporate governance mechanisms can be used to prevent agency motives through incentives and control mechanisms. Additional methods must be considered to safeguard against irrationality of which a challenge of managers’ mindset is essential. Finally, the findings of the empirical study suggest four factors that ex-ante indicate an increased risk of merger failure. These are high cash flow in percent of sales prior to the acquisition, acquisitions of unrelated targets, an outperformance of the acquirer up to the acquisition and a market characterized by high merger activity.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2010
Number of pages130