In this article, we examine acquiring companies’ cash flow performance after a merger in the fifty largest U.S. industrial takeovers from 1979 to mid-1984. In an earlier study, we showed that the mergers in this same sample created new value for the stockholders of the target company and the acquiring company combined.1 But our results here show that the acquirers did not generate any additional cash flows beyond those required to recover the premium paid. However, while the takeovers were break-even investments on average, the profitability of the individual transactions varied widely.
There were two distinct types of takeovers in our sample: (1) friendly transactions that typically involved stock payment for firms in overlapping businesses, which we called “strategic” takeovers; and (2) hostile transactions that generally involved cash payments for firms in unrelated businesses, which we labeled “financial” takeovers.2
Strategic takeovers have several potential advantages over financial transactions. Because they combine firms in related businesses, strategic transactions are likely to offer greater business synergies than financial transactions. Acquiring managers in friendly strategic takeovers are more familiar with the target company’s business and have access to proprietary information in negotiations, which improves their accuracy in valuing the target. Further, stock-financed transactions reduce the cost of valuation mistakes because the stockholders of the target company partially bear some of the consequences of... To read the complete article, login or sign-up using the form below.
Get a premium subscription today to read this and all MIT Sloan Managmeent Review articles.
More Info.
Buy this article. Purchase one or more copies of this article as a PDF.
Subscribe today to read the most recent articles and the current issue of MIT Sloan Management Review.
Upgrade to premium
Current Subscribers: Do you subscribe to MIT Sloan Management Review? Register for online access.
- Register for free access to recent articles and the current issue of MIT Sloan Management Review.
- Subscribe and read articles from the past three years online.
- Premium subscription—access to the entire archive of articles.
