Long-term M&A Value Creation: A Study of the Oil and Gas Industry

Abstract

Mergers and Acquisitions (M&A) have gained widespread adoption among managers as a strategy tool, with the number of deals and their dollar value reaching ever higher levels. However, empirical research indicates that M&A, on average, leads to value destruction. This paper aims to investigate the conundrum between practitioners' appetite for M&A and scholars' inability to justify this pursuit by analysing long-term M&A value creation in the Oil and Gas industry.
The study covers the period from 1985 to 2022 and explores the effects of company- and deal-specific characteristics on value creation, using a sample of 1,160 global M&A transactions undertaken by 419 unique acquirers. To investigate M&A value creation in a qualified manner, the paper provides a detailed review of theoretical perspectives, existing empirical literature, and the industry. The paper employs a combination of two long-term estimation techniques, the event-time Buy-and-Hold Abnormal Returns with matched reference portfolios and the calendar-time Fama & French 3 Factor model with acquirer portfolios.
The results reveal that, on average, M&A in the Oil and Gas industry destroys value in the long term. Specifically, total abnormal stock return estimates of -32.77% and -34.56% are found 3 years post-M&A completion for the Buy-and-Hold Abnormal Returns method and Fama & French 3 Factor model, respectively. Various company and deal characteristics such as absolute size of the acquirer, deal frequency, cash richness, glamorousness, relative size of the target, listing status, geographic and industry expansion, financing method, as well as timing also influence the observed effect.
As such, this study contributes to the body of literature on long-term M&A value creation, specifically within the Oil and Gas industry. Additionally, the paper provides implications for practitioners, emphasizing the importance of making thoughtful strategic choices, experience, size, and a focus on one’s core business to improve long-term M&A performance in the Oil and Gas industry.