Where M&A Pays and Where It Strays: A Survey of the Research

This article uses a large and growing body of academic studies to refute the popular notion that corporate mergers and acquisitions generally fail to increase productivity and end up reducing shareholder value. A careful review of the evidence starts by con. rming the obvious–namely, that the shareholders of selling firms earn large returns from M&A–and goes on to demonstrate an economic reality that is not widely understood: shareholders of acquirers generally earn about the required rate of return on investment, and hence M&A is at least a value‐maintaining proposition. Of greatest interest to corporate practitioners, however, is the very large dispersion of outcomes that underlies the average returns. Closer inspection of this variability shows that certain circumstances and company characteristics are reliably associated with value‐increasing M&A. In particular, acquisitions of related companies tend to be better received by the market and to produce higher post‐merger operating returns than diversifying transactions (though there are a number of successful instances of the latter). Other fairly reliable indicators of value‐increasing M&A are transactions involving mergers of equals or smaller, private targets (where the bidding competition is less intense) and deals structured as earnouts and financed primarily with cash rather than stock.