Which Takeovers Are Profitable? Strategic or Financial?
Are friendly takeover transactions between firms in overlapping businesses likely to be more profitable to acquirers than hostile takeovers involving firms in unrelated businesses? In a detailed study, the authors examine strategic and financial takeovers to determine which generated gains for acquirers, using the fifty largest U.S. industrial takeovers from 1979 to mid-1984 as their sample.
Healy et al. also studied the relation between takeover profitability and three characteristics of the transactions that company management controlled:
1. The target company managers' attitudes, which generally predicted the acquiring company's plans for the target firm.
2. The form of payment, i.e., equity financing or stock and debt securities.
3. The degree of overlap between the merging firms' businesses. High overlap gave the targets and acquirers synergistic gains.
Were the takeovers profitable? The results show that takeovers do improve performance, but the insignificant industry-adjusted cash flow returns after takeover indicate that the improvement was insufficient for the acquirer to earn returns beyond those required to justify the premium. Which takeovers were more profitable? The results show that strategic or friendly takeovers generated substantial gains for acquirers. Financial, or unfriendly, transactions broke even at best.
The authors also examined how investors' expectations related to the subsequent results of the takeovers. The market did not seem to recognize the difference in profitability between strategic and financial transactions.