Extract
Market perception of synergies in related acquisitions.
INTRODUCTION
Unlike the mergers and acquisitions (M&A) era of the 1970s and 1980s where the predominant motives for acquisitions were hubris, empire building, market power, and agency (Jensen, 1991; Roll, 1986; Trautwein, 1990), an increasing number of acquisitions in the 1990s, and in this decade, have been purportedly undertaken for synergistic reasons (Hitt, Harrison, & Ireland, 2001). Synergy has been defined in various ways such as, utilization of the resources that creates value for the combined entity (Chatterjee, 1986), as "valuation of a combination of business units which exceeds the sum of valuations for stand alone units" (Davis & Thomas, 1993: 1334), and as "increases in competitiveness and resulting cash flows beyond what the two companies are expected to accomplish independently" (Sirower, 1997). The synergy motive for acquisitions states that by combining the resources of the two firms, economies of scale and scope are created, which in turn, creates value for the combined entity (Slusky & Caves, 1991). Both market and accounting measures have been used to measure the performance of firms engaged in synergistic acquisitions. Researchers using market measures have focused on the wealth gains to shareholders. The basic findings of these studies can be summarized as follows: (1) shareholders of target firms earn significant positive abnormal common stock returns immediately following the acquisition (Jensen, 1986; Jensen & Ruback, 1983), (2) irrespective of the extent of relatedness between the two firms, acquiring firms earn negative abnormal common stock returns in approximately 65% of the acquisitions (Berkovitch & Narayana, 1993; Datta, Pinches & Narayanan, 1992; Loughran & Vijh, 1997; Lubatkin, 1987), and (3) bidding firms often overestimate the value of the target firms by underestimating the cost of exploiting relatedness with targets (Salter & Weinhold, 1979; Seth, 1990). Accounting measures to study the operating performance of the combined entity following the acquisition have also been extensively used. The basic findings of these studies can be summarized as follows: (1) acquisitions, on average, do not create value (Ravenscraft & Scherer, 1987), (2) the presence of synergies is not sufficient: effective integration of the two firms is essential to realize the synergies (Haspeslagh & Jemison, 1991; St. John & Harrison, 1999), and (3) synergy is an elusive concept, difficult to define and measure and therefore firms often overestimate the perceived synergies between the two partners (Collis & Montgomery, 1995; Markides & Wi...See the full content of this document
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