Mergers and Acquisitions: An Investigation of Changes in Firm Value
Social Sciences
Economics Department; Economics 195: Senior Thesis
This study analyzes large mergers of publicly traded firms occurring between 2000 and 2005 in order to identify the effect that merging has on economic value. The analysis begins by replicating the standard methodology employed in outcome studies to identify the change in value resulting from merging. To address a current gap in the literature, the analysis goes further in identifying and assigning magnitudes to several of the synergies associated with merging. The results show a significant negative effect from merging on both the revenue and profit margin of the merged firm, implying that, on average, mergers destroy value. Further analysis showed that merging has an ambiguous effect on operating synergies; the fact that this is one of the reasons most cited by firm management for merging may help to explain the value deterioration. Finally, the analysis of the effect of merging on financial synergy showed a significantly lower effective tax rate resulting from the merger; however, since this lowered tax rate is a transfer of wealth, it is difficult to argue that such a financial synergy creates economic value.
