The Performance of Mergers and Acquisitions in Developed Capital Markets of Western Europe

Abstract

The performance of mergers and acquisitions (M&A) is one of the key issues in corporate finance. We contribute to existing literature by examining the performance of M&A deals based on the economic profit model and comparing the results with ones obtained by means of traditional methods – accounting studies. Applying economic profit as an indicator of M&A performance allows us, in contrast to existing studies, to assess the impact of mergers and acquisitions on value of European companies in the long-run. Our study is based on the sample of 153 M&A deals initiated by companies from developed capital markets of Western Europe. Analyzing one of the latest periods, 2000–2011 years, we prove that the performance of combined firms improves subsequent to mergers and acquisitions. We find positive industry-adjusted differences between the post-acquisition and the pre-acquisition performance measures. The difference equals to significant 3,3% for EBITDA/Sales ratio and 3,1% for EBITDA/BV Assets ratio. The economic profit approach demonstrates similar results. Economic profit has in creased due to M&A deals by $7,5 million. The obtained results indicate that companies in developed capital markets of Western Europe are able to achieve planned synergies and integrate successfully improving the operating performance and creating value of the combined firms.