Value Creation in Mergers & Acquisitions: A Strategic Rationale Perspective

Andrew James Hole & Adam Roberto Cilio Burman

Student thesis: Master thesis


This thesis investigates whether there is significant value created for acquiring firms when pursuing mergers and acquisitions (M&A). Delving deeper, the main purpose of this research is to examine the value created from five distinct strategic rationales that are built from neo-classical economic theory. Inspired by Walker (2000) and Bower (2001) the five strategic rationales are: increase market share, geographical expansion, product expansion, vertical integration and diversification. The authors have chosen to apply three established quantitative studies: a short term event study of cumulative abnormal stock returns (CAR), a long-term event study of buy-and-hold abnormal stock returns (BHAR) and finally, a long-term event study of operating performance in the form of return on assets (ROA) and return on invested capital (ROIC). These measures are statistically tested against formulated hypotheses through an array of parametric and non-parametric tests. Furthermore, a crosssectional regression is used to test whether the strategic rationales or other deal factors drive the value creation. The sample under scrutiny consists of 226 completed M&A deals that were announced between January 2003 to December 2014 by S&P 500 firms. The findings show that overall M&A destroys value for the shareholders of the acquirer in the shortterm, whilst no value is created or destroyed in the long-term. Regarding operating performance no positive effects can be established, on the contrary, ROIC is significantly negative. The strategic rationales increase market share, geographical expansion and diversification did not provide any significant results, whilst product expansion does erode value, but only in the short-term. A critical finding of this report is that vertical integration is associated with significant value destruction. On average shareholders incur a loss of almost 10% in the short-term as well as realizing negative operating performance (ROA) in the long term. The cross-sectional study supports the findings that vertical integration destroys value in the short-term, as well as cash, size and cross-border transactions drive value in some long-term regressions. The findings extend the literature of M&A through providing insights to how the underlying strategic rationale of a deal effects value creation. Moreover, it serves as a stark warning for managers pursuing seemingly attractive M&A targets, as the promised riches are seldom there for the taking.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2019
Number of pages149