An exploration of the effect of mergers and acquisitions on long-run value creation of acquiring companies within South Africa.

Abstract

There are limited opportunities for companies to expand and grow organically, which is why mergers can play an important role in expansion for an entity. There are two perspectives which can be viewed in terms of a company obtaining value creation through a merger or acquisition transaction, namely, through an increase in the profitability of the company and an increase in shareholder wealth. The focus of this study will be based on the creation of long-term shareholder wealth. The analysis will therefore be conducted from the perspective of an investor and thus lead to the relevant ratios selected for analysis. This area of study is important due to the quantum of investments made resulting in significant potential value creation or destruction. Businesses that have been hampered by a recession which causes economic strain as a result of reduced consumer spending and are therefore enticed by the option of merging with a larger business, or rather forced to become acquired by a larger business. The larger businesses have the ability to sustain themselves during the pressures exerted on them by a recessionary climate and thus are able to continue without economic assistance through a merger. The purpose of this study is to determine the long-run (5 years post-acquisition) effects on the financial performance of the acquiring company to ascertain whether the financial performance is enhanced by virtue of the merger. By conducting a quantitative study on the financial ratios over the pre-acquisition and post-acquisition periods in the long run of the acquiring entity, there can be further investigation to identify any trends over the long-run. The study will contribute to the body of knowledge in mergers and acquisitions by addressing short-comings of previous studies such as using short periods of analysis (less than 3 years) which resulted in insignificant findings and the use of external indicators (example, share prices) which are driven by uncontrollable forces other than the intended measure of internal value creation; and applying the relevant methodologies.