MSC Ifep Thesis 2

MSC.
INTERNATIONAL FINANCE & ECONOMIC POLICY [RESEARCH THESIS]
“A CRITICAL REVIEW OF
PERFORMANCE PUZZLE OF M & AS:
BRITISH AND IRISH RESULTS OVER FEW DECADES”
BY
W S AHMED (M.Sc)
DISSERTATION SUBMITTED IN PART FULFILLMENT OF THE REQIUREMENTS FOR THE
AWARD OF THE DEGREE OF MSc IN INTERNATIONAL FINANCE AND ECONOMIC POLICY
UNIVERSITY OF GLASGOW
2007
CDS – Department of Economics, Adam Smith Building University of Glasgow 1

MSC. INTERNATIONAL FINANCE & ECONOMIC POLICY [RESEARCH THESIS]
ACKNOWLEDGEMENT
This dissertation would not be completed without the assistance of many people. First of all, I
would like to thank Heather Tarbert who helps and kindly advices me throughout this
dissertation. Secondly, I would like to pay my gratitude to my parents and friends, for their love,
support, understanding and encouragement throughout all my years of study.

ABSTRACT
The purpose of this dissertation is to critically review the performance puzzle of mergers and
acquisitions over a past few decades, mostly on British results with minor results, covering Irish
experience. It has been seen in the recent past that, with the progression of takeover activity, the
debate over its advantageous aspects has considerably increased. However, past extensive research
has revealed that, as far as the authenticity of the fact that the transactions of M& As do create value
is concerned, there is still a doubt. This study attempts to explore the impact of mergers and
acquisitions on the bases of empirical evidences, over a past few decades, and further examine that
very fact relevant to the issues of ; value creation process and the bid resistance relationship, size and
growth, performance and profitability, and so on. For this reason, the literature review method is
being employed in this paper, and ten academic research papers, related to this topic, are being used.
After reviewing all the ten research papers, which are being selected in order to provide a
comprehensive analysis over the issues under study, it is, thus, possible to draw a conclusion that over
all impact of amalgamation activity has generated a mix results in respect to returns to the
shareholders of both the target and bidder. Along with that, there are evidences of different results,
generates from takeover activity, on the size and growth, performance and profitability, value creation
and bid resistance relationship, under different environments. However, the results obtained after
examining the different issues under observation can not be termed as a full and final verdict, since
the different techniques, methods, data sample, assumptions, and so on, have been employed in the
ten academic research papers under review.

CONTENTS PAGE#
ACKNOWLEDGEMENTS 2
ABSTRACT 3
CONTENTS 4
CHAPTER 1: INTRODUCTION 7
CHAPTER 2: METHODOLOGY 12
2.1 METHOD AND METHODOLOGY 13

2.2 OVERVIEW OF RESEARCH DESIGN 15
2.2.1 THEORY OF LITERATURE REVIEW 15
2.2.2 STRUCTURE OF SEARCH 16
2.2.3 FINDING APPROPRIATE ARTICLES 17
2.3 LIMITATION 17
CHAPTER 3: A GLIMPSE OF M& As ACTIVITY IN UK 19
3.1 BEFORE 1914 20

3.2 THE INTER-WAR YEARS 21
3.4 POST-WAR YEARS 22
CHAPTER 4: LITERATURE REVIEW 23
4.1 LITERATURE REVIEW 24

4.2 LITERATURE REVIEW OF ARTICLE # 1 26
4.2.1 PRINCIPAL PURPOSE OF RESEARCH 26
4.2.2 BRIEF DISCRIPTION OF METHODOLOGY AND DATA 26
4.2.3 MAIN RESULTS 27
4.2.4 CONLUSIONS 28


4.3.4 CONLUSIONS 32

4.4.4 CONLUSIONS 35

4.5.4 CONLUSIONS 39

4.6.4 CONLUSIONS 44

4.7.4 CONLUSIONS 48

4.8.4 CONLUSIONS 52


4.9.4 CONLUSIONS 55

4.9.4 CONLUSIONS 58

4.11.4 CONLUSIONS 62
CHAPTER 5: INTERPRETATION AND IMPLICATION 63
5.1 INTERPRETING DIFFERENT RESULTS 64

5.3 IMPLICATION FOR SHAREHOLDERS 65
CHAPTER 6: CONCLUSION AND LIMITATION 67
6.1 CONCLUSION 68
6.2 LIMITATION 70
CHAPTER 7: BIBLIOGRAPHY 71

CHAPTER 1:
INTRODUCTION

INTRODUCTION
During the last few decades, empirical research has opened new door-ways to explore and understand
the performance puzzle of mergers and acquisitions. With the progression of take over activity, the
debate over its advantageous aspects has increased. Evidences from the past extensive research unable
to justify the validity of the fact that, the transactions from M& As activity do create value. However, it
has been revealed from most of the study that takeover activity produces two different streams of value
creation for the shareholders– positive stream for target firm shareholders, where as, very often,
negative stream for acquiring firm shareholders, who often lose during acquisitions (Weidenbaum &
Vogt, 1987). Not only that, but the other issues resulting out, from the impact of M &As on; value
creation process relationship with bid resistance, size and growth, performance and profitability, and so
on, have doubted its advantageous and beneficial role at a very critical level. And this demand further
to answer that; with the existence of possible failures in the takeover process, why the firms actively
participate in the activity where one company bid for another?
As, historically, mergers and acquisitions have been considered exclusively the domain of economists,
market strategists and financial advisors; the financial and strategic aspects of the activity are well
appreciated and have been extensively addressed and debated in the management literature. The
mergers activity occurs between two companies coming together – acquirer and acquired. There is a
big list of stakeholders in the company, mostly debatable identities; shareholders and managers.
Efficient and perspective managers always aim to achieve the corporate goal; Maximizing the value of
the firm subject to share price maximization. One of the main purposes of this paper is to investigate

and draw conclusion regarding the impact of takeover activity on value creation of shareholders of both
the target and bidder over few decades, based on British and Irish results.
The first wave of merger in UK strikes during the 60s and why it occurs because of the efficiency-
related reasons, for instance; economies of scale or other ‘synergies’, removal of incompetent target
management, diversification merits, elimination of agency costs. After its booming year of 1968, the
first wave of merger diminishes. During the early 1970s the merger wave started to rise again and hit its
second peak in 1972. The third was during the period of 80s and this was the period of dominance of
mergers, acquisition and other form of strategic alliances over business and financial press.
The preoccupation along with the incidents in terms of massive positive outcomes out of the
organizational marriages during the 80s made the mergers and acquisition a world wide growth
industry. However, the activity of mergers and acquisitions declines substantially as the organizations
move to ‘downsize’ rather than ‘upsize’ their operations. But, the managerial predictions were
suggesting that lot to be gained from M& A, and due to its persuasive and seductive appeal this activity
have gained business confidence and M& A started to pick up once again. During the period of 1993-
2000 the UK has experienced the fourth merger wave, and it has been confirm by the survey
(Catwright, Cooper and Jordon, in press) of almost 500 senior European managers of its continuity
during the period of 90s.
The process of acquisition might prove to be a useful tool for management, by taking away obstacles in
the way of achieving growth objective (Penrose, 1959).Also, the firm can get from acquisition the new

opportunities of investment and start work in a totally different business environment with working on
a new product line (Cable, 1977). It has been noticed that the mostly the takeovers have happened with
the intention of changing the whole pattern of business been transacted before by the acquired company
during the 80s and 90s.However, in 2001, UK has experienced a drastic change in the M& A activity
and its graph went down which is mainly due to the shifting of consumer interest from the internet and
telecommunications industries.
Although mergers vary by type, there have been many theories put forth to explain the general nature of
merger activity. For instance, the theory of the firm and the theory of economic "natural selection", has
given a noticeable preference in this paper to find out the implications of takeovers results over this
theory. In relation to stock performance analyses in the activity of M& A, it has been argued that, if,
capital markets are efficient enough that it can capture all the future costs and benefits of mergers and
discount them at the same time into share price, than the occurrence of long term valuation changes
cannot be related to acquisition (Sudarsanam, 2003). One can argue, the capital markets works on the
semi-strong level, which may make sense, then only after analyzing the considerable amount of years it
can revise the decision on the bases of new information about the progress of takeovers and competitor
response. However, if the stock market valued the stock prices in a way that it contains valuation errors,
then there is a possibility that the firm can be undervalued or overvalued (Scherer, 1988).This paper also
gives an insight about the stock performance activity after the deal has been completed and how it
turned up over considerable period.
With respect to empirical evidences, the purpose of this dissertation is to critically review the

performance puzzle of mergers and acquisitions over a past few decades, along with further
examination of results, thus obtain, in relevant to the issues of ; value creation process relationship with
bid resistance, size and growth, performance and profitability, and so on. In relation to returns to
shareholders of target and bidders, there are mixed kind of empirical evidences. For instance, usually,
but not always the acquired organisation is smaller and/ or less profitable than its acquirer (Singh,
1971; Meeks, 1977). In addition to that this study further provide a comprehensive insights on the
issue of value creation process during the bid period and its relationship with the bid resistance, and
the examination of failure rate of acquired firms, during the boom in mergers of U.K companies.
This paper proceeds as follows; Chapter 1 introduces the motivation and purpose of this paper. Chapter
2 describes the methodology being used in this study, which further discuss and explain the
advantageous aspect of literature review and discuss why this method has been chosen through
comparing it with other methods of event study, case study and literature review. Chapter 3 gives past
glimpse of mergers and acquisitions in U.K. Chapter 4 base on revision of ten academic articles in
order to provide comprehensive results, related to the research work, to be analysed later on. Chapter 5
involves interpretation of results from the ten articles and discuss implications issues for shareholders.
Chapter 6 summarizes conclusion and limitation, and finally, Chapter 7 represents Bibliography.

CHAPTER 2:
METHODOLOGY

2.1 METHOD AND METHODOLOGY
The word methodology is normally considered to be a branch of philosophy or logic among a wide
range of literate people, though most often some logicians termed logic being a part of methodology.
“Methodology refers to the overall approach to the research process, from the theoretical
underpinning to the collection and analysis of the data. Like theories, methodologies cannot be true or
false, only more or less useful” (Silverman, 1994).
Where as the method, used in educational research, refers as a different way of approaches used as a
basis for interpretation and inference for explanation and prediction either new facts or one’s which
already being explained. These approaches basically are the techniques connected with the model
known as positivistic model, which includes – recording measurements, describing phenomena,
drawing out conclusions out of predetermined questions, performance of the experiments. This has also
been confirmed by most of the researchers that the one should have a full understanding on the
philosophical aspect of study which is linked to his specific academic papers. Accordingly, this will
some how effects the entire piece of research work which mainly includes the activities of gathering the
required information, collecting and analysing the data, pin out the limitations and try to fill in the gaps
where ever it is essential (Hussey and Hussey, 1997).
If method, as a technique or procedure, involves a process in which there is an activity of data-
gathering, then the aim of methodology can be explained easily in the words of Kaplan:
“To describe and analyze these methods, throwing light on their limitations and resources, clarifying

their presuppositions and consequences, relating their potentialities to the twilight zone at the frontiers
of knowledge. It is to venture generalizations from the success of particular techniques, suggesting new
applications, and to unfold the specific bearings of logical and metaphysical principles on concrete
problems, suggesting new formulations” (Kaplan, 1973).
The five most frequently used designs or ‘‘traditions’’ of qualitative research include: (a) ethnography,
(b) grounded theory, (c) biographical, (d) case study, and (e) phenomenological (Creswell, 1998). The
percentage of importance given to one of the techniques known as qualitative is usually done through
the trustworthiness of the data related to confirm ability, credibility, dependability, and transferability
(Guba, 1981). The literature review is regard as a main method which is subjective in nature and
applies to the qualitative research. The main purpose of subjective research is to further exploration of
different prospective. Therefore, the subjectivity holds an important position in this dissertation and
should reflect through out the study.
Since it has been mentioned earlier that the philosophical position of the study is important, thus it is
essential to draw attention towards the two main philosophies – Phenomenology and Positivist
paradigms. In the positivist paradigm, we get a view of an observer as an independent identity, world
considered to be external and objective, and science is termed as an unbiased or we can say it value-
free as well. On the other hand, when we study the phenomenological paradigm it gives us a view of an
observer being a part of what is being observed, world considered to be subjective and socially
constructed, and science is opposite to what we have in the positivist paradigm i.e., biased (Easterby et
al, 1996). Perhaps, for the positivistic researchers, phenomenological methodology is term as the most

controversial of all forms of qualitative inquiry which depends upon the post-modern philosophies and
interpretive techniques (Sabornie, 1994). Thus, in this paper the phenomenological paradigm is being
applied as a research method of literature review, which is subjective in nature.
Research work, in the field of accounting and finance, has three common methods – Empirical
research, case study research, and literature review. Empirical study involves an activity of establishing
the relationship between the variables under observations (Ryan et al, 2002).This research work has a
motive to critically analyzing the performance puzzle of mergers and acquisition which mainly involve
the issue of its impact on; shareholders returns, size and growth, value creation process and bid
resistance relation ship, performance and profitability, and so on, over a few decades. In this regard,
empirical research and literature review method might be suitable, rather than others methods. If we
look into the previous empirical research work the most work done by the researchers is based on the
event studies under the similar context. However, event study method has some disadvantages,
specially under the assumption that capital markets are efficient, event study method happened to
evaluate the impact of events on expected future gains for the shareholders through the expected profit
of the firms. This specific study is mainly based upon the literature review method, by keeping in mind
the factors like - the empirical study might take a long time to collect data and the time barriers.
2.2 OVERVIEW OF RESEARCH DESIGN
2.2.1 THEORY OF LITERATURE REVIEW
“Knowledge doesn’t exist in a vacuum, and your work only has a value in relation to other people.

Your work and your findings will be significant only to the extent that they are the same as, or different
form, other people’s work and findings”(Jankowicz, 2000).In preparing the research work, it is very
important to keep up the work in contact with the previous relative work.
“A common misunderstanding with critical literature review is that they become uncritical listings of
previous research, often being little more than annotated bibliographies” (Hart, 1998).
More over, in a broader sense literature review is said to be the summary which might be obtain from
the combination of observed facts and findings out of the literature search which is very important for
any research activity. Together, this all would helps in doing the work with in the context, along with
an intention to further understanding of the reviewed articles and shape the work in a different and
more desirable way.
2.2.2 STRUCTURE OF SEARCH
In the process of structuring the search as per requirement of the dissertation, which is mainly
comprises of reviewing books and journals, three stages are involved. At the very first stage of
compiling the dissertation work, internet facilities are being taken into consideration. Due to the
worldwide advancement in the field of technology it is now become easier to access the articles of any
kind. Also, the search engines – Ask, Alta vista, Google etc, generally proves to be very vital during
the search process. Second stage involves an activity of accessing the electronic versions of the
professional journals, which are easier to access for the computer and internet users. Also, the library
services have been utilised in the best possible way, with the data bases having numerous networked

journals, which are further arranged alphabetically and by subject. Lastly, the third stage involves the
vast range of books and journal reviews and there availability in the university library. These all stages
leads towards the assurance of the suitable environment for the research work that any writer would
likely to have in order to bring about the healthier and beneficial research work for others.
2.2.3 FINDING APPROPRIATE ARTICLES
The initial search revolves around the activity of finding and reading of articles which are roughly forty
to forty five in numbers, and mostly main concern is given to the introduction and conclusion sections.
After that there comes the final selection part of the articles out of many and since this is a basic
requirement of the dissertation, therefore ten articles identified as the key literature review materials.
The selected articles have a close relevance with the research question. Despite the fact that the articles
has already been chosen however, it has been ensured that if there is a need to replace any of the
articles during the review it will be done immediately, to keep up live a reader’s interest in a topic.
2.3 LIMITATION
Like every research, this paper also has to go through some restrictions on its own. Like the research
method used is mainly depending upon the review of the articles, which themselves are limited in
numbers. It is quite impossible to go through all of the articles and have an in depth study in a shorter
allocated time period. The personal knowledge of a writer in selecting the specific articles for the
research work couldn’t be regarded as a full and final verdict and therefore, said to have biases on some
points. Apart from that, the main motive of a writer is to work on dissertation in a most beneficial way

and to focus entirely on the main theme question with keeping in mind to provide a comprehensive
analysis and insight of a subject matter under study. It has also hoped that the work been done under
the circumstances could fulfil the part of work assigned during end of the semester and meet the
dissertation requirement thereby.

CHAPTER 3:
A GLIMPSE OF M& As ACTIVITY IN UK:
(PRE, INTER, POST-WAR PERIODS)

3.1 BEFORE 1914
During the mid of 18th century, the comparative advantage of mergers and monopolies couldn’t be
gained, due to number of reasons; despite the fact that the companies could be formed through an easy
process of registration since 1844 and in 1855 the general limited liability could be obtained, still the
massive industrial activity of that time was in the hands of few dominant business family. Even after
becoming companies they were still worked as ‘private’ companies, though not in law. Up until 1914,
although there were very little takeovers movements in UK industry, the facts and figures do present
some really interesting lessons which prove to be a guide in present day amalgamation movement in
British industry.
British merger activity enjoyed the advantage of company law before 1914 which were different than
that of older English law on trusts and trustees. The process was not easy for the massive businesses to
merge into larger unit before 19th century time due to the fact that they, unlike, modern company, did
have diffused share ownership and fewer family loyalties. Till 1930s, there was no existence of
Britain’s policy of free trade which affects the power of monopolist to raise prices in general and also
different industries in particular. The British coalfields were very much affected and scattered and the
family who owns the business were reluctant to have a business conversation with their rivals from
other parts of the area. Like wise, British cotton industry, which was considered to be the highly
concentrated at that time, also did not seem to adopt the ‘combining’ concept as strongly agreed by the
larger proportion.
In brief, with the existence of high degree of specialization, which was giving benefit to the customers

to the different part of the world, was against the concept of standardization of product, which might
boost up the concentration level of production. However, where ever there was any success, as an
outcome through the ‘combinations’, it was mainly attached with the manufacturing or management
skills. And in the absence of these skills usually the combines happened to be a failure, which further
affect the extension process.
3.2 THE INTER-WAR YEARS
During the period of two world wars British trade industry experienced major set backs to her
important ‘nineteenth-century’ industries. During this transition period of leaving war zone and
entering into the peace zone brought interruption to world trade along with that affecting some of her
major markets. Many of the companies felt considerable amount of damage caused due to old and new
amalgamations. As a result of that damaging effect many of the larger combines were declined
absolutely or where replaced by new firms in new industries.
The 1947 edition of Stock Exchange Year Book accounted that more numerous amalgamations are
interestingly less successful, out of the pre-war experiences of the major merger activity. Where as, the
term ‘Successful’ here means that the steady dividends were being paid to shareholders and no capital
was written off. It has been noticed that the mostly successful mergers of firms happened in the same
business-line trade where concentration given to only process activity at a very large scale – unlike
other mergers which were involved in a multitude of different activities and that might be the major
cause of their failures.

3.4 POST-WAR YEARS
The post-war period, since 1945, happened to be totally different for businesses if we economically
examined and compared the background conditions of the amalgamation movements. Second World
War caused greater damage and disrupter to the economy as far as financial aspects of businesses were
concerned. The period of post-war readjustment mainly was dealing with the environment of very
changed circumstances of shortages; financial controls; and massive loss of businesses in overseas
markets. Some of the industries has faced decline in there businesses not because of general trade
depression but due to the fact that the larger portion of their older customers have developed a taste for
a new product. However, by considering the previous European Wars – Thirty Years War, the
Napoleonic Wars and the First World War, one might conclude that Britain economy made remarkable
recovery.
The business conditions during the post war period have been easier and more profitable as compared
to pre war. The Government followed the Keynesian Revolution of full employment and expansion
policy which results in the higher profits, generates through the activity of higher consumer demand
which results in higher sales to producers and than profits. Apart from the symptoms of monetary
inflation started to appear, there has a considerable amount of economic growth been recorded in real
terms with the surety of higher living standards as compared to other countries. But one can not
overlook the fact that main cause of economic progression in UK industry is because of the
management efficiency arising from the mergers. It has been noticed that the companies having
superior top management tend to generate huge profits for the shareholders.

CHAPTER 4:
LITERATURE REVIEW

4.1 LITERATURE REVIEW
In this section of the dissertation work ten articles have been chosen to give a comprehensive insight to
the research question. Each of the articles has been reviewed and studied individually. They have been
worked out separately and further divided into sub-sections – query, summary of method applied,
results, and conclusions which eventually gives a reader a concrete knowledge and understand ability
over the issue under discussion. Below is the list of main articles which we going to further explore in a
later chapters:
“An Industry Study of the Profitability of Mergers in the United Kingdom”
by J. R. Franks; J. E. Broyles; M. J. Hecht (1977).
“Takeovers, Shareholder Returns, and the Theory of the Firm”
by Michael Firth (1980).
“A Study on the Wealth Effects of Irish Takeovers and Mergers”
by Louis C. Murray (feb, 1991).
“Target Company Cross-border Effects in Acquisitions into the UK”
by Danbolt, J. (2004).
“Wealth Creation and Bid Resistance In U.K. Takeover Bids”
by Peter Holl; Dimitris Kyriazis (1997).

“Take-overs, Economic Natural Selection, and the Theory of The Firm: Evidence
from the Postwar United Kingdom Experience”
by Ajit Singh (Sep., 1975).
“Growth, Acquisition Activity and Firm Size: Evidence from the United Kingdom”
by M. S. Kumar (Mar., 1985).
“The Impact of Acquisitions on Company Performance: Evidence from a Large
Panel of UK Firms”
by Andrew P. Dickerson; Heather D. Gibson; Euclid Tsakalotos (Jul., 1997).
“Synergism in Mergers: Some British Results”
by Michael Firth (1978).
“Changing Pattern of Acquisition Behaviour in Takeovers and the Consequences for
Acquisition Processes”
by John W. Hunt (Jan., 1990).

4.2 LITERATURE REVIEW OF ARTICLE # 1
J. R. Franks; J. E. Broyles; M. J. Hecht (Dec., 1977), “An Industry Study of the Profitability of
Mergers in the United Kingdom”, The Journal of Finance, Vol. 32, No. 5., pp. 1513-1525.
4.2.1 PRINCIPAL PURPOSE OF RESEARCH
Franks, Broyles and Hecht (1977) work mainly have two purposes; prime purpose is to gather the
information about any gains and losses to shareholders from the behavior of share prices in the U.K.
Stock Exchange Market, from the mergers activity in Breweries and Distilleries industry. Secondary
purpose is to further asses and draw conclusions, if any, from the gains and losses pattern of the share
holders of both the acquirer and acquired firms, out of merger and acquisition activity. In addition, this
paper also gives an insight about the level of efficiency of London capital market, and how the
forthcoming information about the mergers influences the pricing pattern of equities.
4.2.2 BRIEF DISCRIPTION OF METHODOLOGY AND DATA
During the period 1955-72, Franks, Broyles and Hecht (1977) examines the abnormal gains for
shareholders of both the acquirer’s and acquired companies involved in the mergers in the U.K.
Breweries and Distilleries sector, out of the sample obtained from the Daily Official List of Stock
Exchange, London. They have chosen the standard market model, which is the most common and
widely used as an event study model. There is a hidden benefit in using the market model - it helps in
reducing the effect of variance of abnormal return which makes it possible to detect event effect more

effectively (Dasgupta, Laplante, Mamingi 1998). The study construct an effective announcement dates
from t = -40 to t = 40 as a time reference.
The researchers make adjustments into the original Fama, Fisher, Jensen and Roll (1969) method of
calculating abnormal stock market returns in response to the public announcement. As well, other
adjustments and alterations also being applied like - there were 94 mergers available in the industry,
during the period of 1955-72, which was reduced to 70 mergers due to the lack of adequate
information; fixation of the double counting of the pre-mergers interest to the shareholders; treating the
17 holding companies as a acquirer after the merger; adjustment of “non-trading effect” arose due to
the combination of the thinness of trading together and unreported transactions; and because the
London Business School Data Base was still in the process of compilation during the work, alternative
ways were adopted in creating the market index.
4.2.3 MAIN RESULTS
Franks, Broyles and Hecht (1977) reveal that there are hardly any gains to acquirors’ shareholders
during the months subsequent to mergers. However, the Cumulative abnormal returns (CAR)’s of
acquirees’ fall, during the months t = -40 and t = -15 and relatively less profitable than the acquirors
during this period.
The time period between t = -15 and t = -4 proves to be beneficial to acquirees and it rises to 5% as
compared to the acqiuror’s (CAR) which remains unchanged. Apart from that, acquirees’ (CAR) rises

up to 26% by the t = 1, approximate offer date as compared to acquirors’ (CAR). This will suggest that
the acquirors’ shareholders haven’t gained substantially well, as expected; also it shows the strong
anticipation of the market just 3 months prior to actual announcement date, to anticipate the merger
event on average. There is a gain recorded to the acqiuror’s shareholders during the time of merger
reflect nothing but the readjustment pattern behavior of London Stock Exchange market, which is
consistent with the results of Kaplan and Roll (1972).
Franks, Broyles and Hecht (1977), also examines the economic benefit to shareholders by combining
the results of (CAR) of acquirees and acquirors shareholders. According to them, the period of t = -4
and t = +1, which is a period where the market was very much likely to respond to the event of merger,
they have recorded a gain of 0.10 which is non-the-less shows smaller abnormal gains.
4.2.4 CONLUSIONS
Franks, Broyles and Hecht (1977), notice that the shareholders of the companies involve in the merger
activity in U.K. Breweries and Distilleries sector has experienced a net gains. Apart from some
temporary positive gains for shareholders of acquiring companies, it has been observed that the
Perfectly Competitive Acquisitions Markets Hypothesis is consistent with its hypothesis that the all net
benefits are for the acquiree’s shareholders in the merger activity. Also, the U.K. capital market
observed to be consistent with the Efficient Capital Markets Hypothesis and able to reflect fully the
relevant information in capital market prices.

Michael Firth “Takeovers, Shareholder Returns, and the Theory of the Firm”, The Quarterly
Journal of Economics, Vol. 94, No. 2. (Mar., 1980), pp. 235-260.
Firth (1980) work mainly base upon to report the results, out from the impact of takeover activity, on the
wealth of shareholders, in the U.K. The researcher work is different in a sense that it takes into
consideration the theory of firm in drawing out the results. The paper also takes in to consideration the
behavioral motives of takeovers and examines by briefly reviewing the empirical evidence to date in
U.K. and U.S.A.
It is also evident from the recent research that the ‘profitability’ generates from the monopolistic factors
and through implementing the sound base of superior management in acquired firm (Manne, 1965). Due
to that fact, the considerable portion in millions of pounds has been invested to take a charge of
companies in Britain. Firth (1980) also examines the gains to shareholders, generates out of the returns
from the securities they have invested, and the benefits to management, if any, during the mergers and
acquisitions process.
Firth (1980) examines the data of the bidders and targets firms listed in stock exchange market during
the period of 1965-75 and, summarize results on the basis of the successors and failures during the

process of takeovers. The researcher concludes that bids out of 486 targets and 563 bidders, only 355
bids were successful; after the revision session of bids 79 bids termed as successful; and 52 were un-
successful.
Firth (1980) uses the market model relationship, in-order to draw the result of expected return, as
suggested by Sharpe (1963). Where as the shareholders’ wealth effect consequent to takeover is
measured adjusting the actual returns on a security against those returns which are expected, incase if
there had been no takeover activity happened. i.e.
Uij = ARjt - ERjt,
Where,
Uij = residual for security j in time t.
ARjt = actual return on security j in time t.
ERjt = expected return on security j in time t.
The study consider the relationship i.e. ERjt = αj + βjRMt for estimating the period
covering last 48 months with the exclusion of period 12 months prior and subsequent to the takeover bid
months in order to account the shifts in the risk of parameters β (Mandelker, 1974). In order to capture
the shifts in the risk parameters in the context of pre and post-period of bid announcement, following
dummy regression is run;
Rjt = aj + a`jDt + bjRMt + b`jDtRMt + ejt

The Dummy variable Dt, is set equal to zero for the period month -48 to month -13, and, set equal to
one, for the period +13 to month +36.Moreover, in-order to find out the impact of takeovers process
over the security returns ‘average residuals’ AR and ‘cumulative average residuals’ CAR being used.
Firth (1980) follows the same methodology, which being used in driving the results for the takeovers
activity in USA during that period by Mandelker (1974), Ellert (1976), Dodd 1976 and Ruback (1977)
and Kummer and Hoffmeister (1978). This helps the researcher to solve the hidden problem of
overlapping results getting from the test statistic of average monthly residuals of securities by simply
constructing portfolios of securities and calculating standardized portfolio residuals.
4.3.3 MAIN RESULTS
Firth (1980), find out some very interesting results related with offeree firms; up until one month left,
for the merger activity to be happened, the portfolio t-statistics shows insignificant results in term of
evidence of any abnormal share price behavior; during the last month i.e. -1 the t-statistics shows
significant results and there is a sharp up ward movement of roughly 80 percent in gains of sample
securities; and substantial gains being recorded in 99 percent of securities during the bid announcement
period. Furthermore, positive residuals during the period month +13 to month +36 shows that the gains
exists during the 3 years after bidding announcement, even though the takeover deals was a failure.
This also gives an indication of an efficient market behavior; unbiased estimation of the future returns
to security holders in response to the initial movement in the share price.

Firth (1980) evaluates that there is no abrupt activity in the abnormal gains to bidding companies prior
to bid announcement unlike to American research findings by (Dodd, 1976 and Ruback, 1977). During
the month 0, there was negative activity recorded in residuals out of 80 percent of securities for bidding
firms proves costly to them. However, after a year to the bid announcement, the positive residuals show
stock market takes a failure bids as good news and as a result there are positive gains to unsuccessful
offerors.
Firth (1980), also indicates that there is no gain no loss situation existed during the mergers activity in
Britain in the period 1969- 1975, simply because the gains of offeree firm are being directly cancelled
out by the losses made to the offeror firm. However, as far as benefits to management are concerned, a
regression analytical test has been carried out which shows a positive results for management of
acquiring firm even though the takeovers result into failures or losses to shareholders.
4.3.4 CONLUSIONS
Firth (1980) notices that the merger and acquisition activity in U.K proves to be beneficial for acquired
firms’ shareholders and acquiring firms’ directors. However, in contrast to that the acquiring
companies’ shareholders suffer substantial losses and that proves to be a risky business for them. As far
as stock market is concern, it views the takeovers activity merely adds into the corporate profitability,
and that the takeovers significantly reduce the value of acquiring firm.

Louis C. Murray “A Study on the Wealth Effects of Irish Takeovers and Mergers”, Managerial
and Decision Economics, Vol. 12, No. 1. (Feb., 1991), pp. 67-72.
Murray (1991) evaluates the share-price effects of mergers and acquisitions activity on the Dublin
Stock Exchange based upon the findings of an empirical study. The main purpose of the study to find
out that whether the results of returns from the shareholders on the Dublin Stock Exchange similar to
past expected pattern of returns to biding- target-company shareholders from acquisition activity (e.g.
Jarrell et al., 1988 and Jensen and Ruback, 1983). This research paper also has an insight over the
market in-efficiencies behaviour during the acquisition period of 1965-83.
Murray’s (1991) work mainly covers the data over the period 1965-81 in which it is make sure that
both the acquirer and acquiree will be quoted. Due to that fact total number of recorded acquisitions of
quoted companies resulted to be 45, out of which 40 mergers and acquisitions are taken into
consideration because the 5 companies were not actively traded on the exchange. The researcher
follows the Dodd (1980) method of designing the data; base data comprises of initial announcement
dates of the acquisitions, where as dates are being identified through daily study of financial pages of
Irish national newspapers. It has been ensured that the data of share-prices for each of acquiror and

victim should represent, before and after, of acquisition year.
Murray (1991) constructs the study pattern of his work by taking pre-event performance period of the
acquiring firms to assess the effects of acquisition, unlike proposed by (Magenheim and Mueller,
1988), who proposed longer post-acquisition period and found cumulative net losses over a three-year
period. With the existing imperfections in the Irish market as notified by O’Brien (1982), the standard
market model is being rejected, which may cause bias in the estimates and instead the weighted-least-
squares version of the model is being applied as suggested by Scholes and Williams (1977); and Marsh
(1979) .i.e.
Rit / √T = ai * √T + bi * Rmt / √T + e`it
Where as,
√T, represents the square root of the trade-to-trade interval; and e`it, represents the relation eit / √T.
Murray (1991) estimates residuals by taking into consideration the technique adopted by Fama et
al.(1969) of using exclusion period comprises of 25-weeks, and estimate the parameters separately out
of pre and post-merger data, following a work of Firth (1980). Furthermore, the t-test statistical
approach being used in order to get values from average and cumulative average residuals.
4.4.3 MAIN RESULTS
Murray (1991) finds out that the results of the victim firms do indicate random price fluctuations upto
week -20, having a similar pattern as confirmed in both American based study by Langetieg (1978) and
British based study done by Firth (1979). Moreover, the indication of strong upward movement in

share prices, made by the residuals for week -6 to -3, is nothing but a reaction to the forthcoming bids.
As well, the significant results of remaining residuals from t-test strongly recommend that the Dublin
Stock Exchange is efficient in relation to successful takeover bids. There is an indication of 30 percent
excesses points of net gains for the shareholders who maintained their holdings upto two years.
Murray (1991), however, find out that the results of the acquiror indicating a pattern of normal price
fluctuations even beyond week -10, except that of only two readings in weeks -39 and -23, which later
on turned down with the assumption that they could be related other than the acquisition activity. There
is also an indication of strong market anticipation about a forthcoming event during the week -6 and -2,
which possesses the large +ive and –ive significant residuals respectively. Where as, during the post-
announcement periods, the average residuals from week +26 to +28 indicate an increase in the share
values.
4.4.4 CONLUSIONS
Murray (1991), concludes that the tendency of Irish market, in anticipating the forthcoming events of
takeover bids, is marginally slower as compared to its larger neighbours i.e. London Stock Exchange
markets and New York Stock Exchange markets. However, there is a similarity in the results; concern
with increasing pattern of victim company prices; and, that of excessive positive returns prior to formal
announcement of bids, as reported in earlier studies (see Jarrell et al., 1988; Bardely, 1980: Dodd,
1980; Firth, 1979, 1980). Where as, there is a lesser activity being recorded in connection with the
performance behaviour of acquiring companies, as a result of takeovers. Briefly, on average, the

evidence, regarding the performance of both the acquiror and victim company, suggests that the
mergers do posses value enhancing effect.

Danbolt, J. (2004), “Target Company Cross-border Effects in Acquisitions into the UK” European
Financial Management, Vol.10, No.1, 2004, 83 – 108.
Danbolt (2004) evaluates new evidences on the abnormal returns pattern for the targeted shareholders
involved in the cross-border and domestic acquisitions of U.K firms. In addition to that, the research
mainly involves in finding out any link between the cross-border effect and the different characteristics
of domestic and overseas acquisitions. Moreover, the factors like; international risk diversification,
market access, exchange rate effects, and managerial, are being investigated in relation to abnormal
returns from take-over activity.
During the period 1986-91, Danbolt (2004) examines the abnormal gains for shareholders of the
acquirer and companies involve in the domestic and cross-boarder mergers activity in the U.K. The
data comprises of 116 cross-border and 514 domestic takeovers bids on or after the 1 January 1986 and
end of December 1991. The researcher consults to Acquisition Monthly, in order to have every single
kind of information that one can get, involved in the takeover activity and proves to be beneficial for
this paper. Along with that, for exchange rate data, the researcher consults to the Datastream, and for
data on weather the acquiring companies involves in EU operation before the acquisition, sources like –

company accounts, Datastream, Gloable Access, Extel, Financial Times, Sequence are being searched.
Further more, London Business School Risk Measurement Service and London Business School Share
Price Database are also being consultant along with other sources mentioned before.
Danbolt (2004) chooses ‘three conventional models’ and ‘two sized-adjusted benchmarks models’, who
have an ability of giving results through observing common size effects in the return generating
process, as revealed by past researchers (see Kennedy and Limmack, 1996; Gregory, 1997; Higson and
Elliott 1998). For this purpose, Index, Market, and Capital Asset Pricing model are being used as a
‘three conventional models’, where as, Size-deciles control model and Hoare-Govett small companies
model are being used as a ‘size adjusted models’.
Danbolt (2004) analyses the pattern of share price performance of both the domestic and overseas
acquisitions, subsequent to the bid, over a period from month t-8 and t-5. Cross-sectional t-test
technique is being used in order to test the significant level of equally weighted cumulative abnormal
return; and, mean t-test involving two sample difference method, is being used to test the differences in
the domestic and overseas acquisitions abnormal returns.
4.5.3 MAIN RESULTS
Danbolt (2004) obtain interesting results related to abnormal gains to both the cross-border and
domestic target shareholders during the takeover period of 1986-1991. The researcher observes that
“UK targets shareholders in domestic transactions poorly performed, over all, as compared to

shareholders of target firms involved in overseas mergers”.
Danbolt (2004) finds out that, the UK listed companies targeted in 514 domestic acquisitions, having
negative abnormal returns in every month from t-8 to t-3. However, there is an indication of positive
abnormal gains accrue to target shareholders in domestic UK acquisitions, during the month t-1. The
abnormal gains further increases to 20.29% (with the market models), during the bid month. Briefly the
overall indication from the pre and post bid period indicate the significant amount of returns for target
shareholders in domestic U.K. acquisitions, and certainly during the bid announcement month.
Danbolt (2004) also finds out that, UK target companies in 116 cross-border acquisitions into the UK,
also under perform in the very month from t-8 to t-3. However there is an indication of abnormal
returns both prior to two months and in the bid announcing month. Further more, differences in the
average abnormal returns to shareholders, in both the cross-border and domestic acquisitions,
significantly under perform during pre-bid period, and even in the bid month the abnormal gains are
very small. More over, there is an attributed impact of effect of cross border acquisition that forms a
linkage with the different characteristics (i.e currency strength of foreign acquiring firms, the mode of
payment in bid, etc.) of domestic and overseas acquisitions.
4.5.4 CONLUSIONS
Danbolt (2004), concludes that during the pre-bid period, target shareholders in both the domestic and
cross-border acquisitions, poorly performed in terms of abnormal gains expectations. However, there is
an indication of significant abnormal profits for both of the targeted shareholders during the month of

the bid announcement. Moreover, he concludes that there is an indication of existence of relationship
between the effect of cross border and effects of modes of payment, during the takeover period under
consideration.

Peter Holl; Dimitris Kyriazis (1997) “Wealth Creation and Bid Resistance In U.K. Takeover Bids”
Strategic Management Journal, Vol. 18:6., pp.483 – 498.
Main purpose of the study, as purpose by Holl and Kyriazis (1997), is to further investigate the
relationship between the determinants of wealth creation process and bid resistance in successful
takeover bids. They proceed on, by considering the UK corporate environment, and do hypothesis over;
the agency conflicts; and the role of corporate governance mechanism in order to overcome the
conflicts. The researchers also investigate the presence of various synergies and the conflict arises
among management and shareholders, as a result of takeover activity.
Holl and Kyriazis (1997) investigate the determinants of wealth creation and bid resistance and interpret the
relationship between them, with sample covering 178 successful take over bids in Britain. They construct the
data from both the primary source - Investors' Chronicle, Mergers and Acquisitions Monthly, Mergers and
Acquisitions International, London Share Price Database (LSPD), Datastream and Extel cards; and, the
secondary source – published studies of Holl and Pickering (1988), Parkinson and Dobbins (1993) and
Limmack (1991).

The work approach has been summarized into three different features;
1. Mood, being a response to the bidding company, taken as a key management decision, and the
wealth accruing to the target firm, as a result of the bid is being accepted, taken as a key
performance indicator.
2. Work is being considered with in the context of past work done by Porter (1981), and Rumelt et
al. (1991) Markides (1993), Mueller (1994), Seth and Thomas (1994).
3. By considering and investigating the behaviour of variables, together and on their own, as
mutually dependant variables and develop the equation system in simultaneous way in order to
get the richest insight (i.e. considering the separate equation of ‘mood’ and ‘wealth’ being a
function of each other).
Moreover hypotheses are developed in order to further explore the fact that the synergy (operational,
managerial and financial) effects of takeover bids are a function of the principal-agent relationship and
the corporate governance system. Following are the types of hypothesis being constructed under two
different contexts;
In the context of wealth creation accruing to the target firm;
W1, hostile bids, as compared to friendly ones, will be associated with high returns (see Walkling,
1985; Datta et al.,1992), W2, higher target returns for the related mergers than un-related once, W3,
well-managed bidder firms takeovers poorly managed target firms (see Lang et al.,1989), W4,
managerial alignment inter-linked with the low levels of managerial share ownership, and managerial
entrenchment interlinked with higher levels (see Stulz, 1988), W5, negative relationship between large

shareholders and wealth creation (see Shleifer and Vishny, 1986), W6, wealth creation after takeover is
inversely related to size of bidder holdings in the target firm (see Stulz et al., 1990).
And, in the context of Mood, being a response of target management to an offer;
M1, inverse relationship between bid resistance and bid premiums (see Walkling and Long, 1984), M2,
target management prefer related bids over unrelated once, M3, inverse relationship between
managerial holdings in target firms and bid resistance, M4, large shareholdings are significantly related
to bid resistance, M5, inverse relationship between bidder holdings in target firms and bid resistance
(see Walkling and Long, 1984), M6, positive relationship between amount of debt in the bidder firm
and bid resistance.
Holl and Kyriazis (1997) adopt a model that determines – response of management to takeover bid,
and, effect of the bid on the long run performance of the firm. Model is comprises of two equations of
‘mood’ and ‘wealth’ which posses endogenous, predetermined and control variables;
Wealth = f (MOOD, INDFIT, VALR, TDIRSHR, TDIRSHR2, LRGSHR, BTOEHOLD,
LSIZE, CYCLE, SINGLE, CASH, OUTLIER)
Mood = f (WEALTH, INDFIT, TDIRSHR, LRGSHR, BTOEHOLD, GEARDIF,
LSIZE, SINGLE, CASH)
Where as;
MOOD = W1, WEALTH = M1 , INDFIT = (W2,M2), VALR = W3, TDIRSHR = (W4,M3), LRGSHR =
(W5,M4), TDIRSHR2 = W4, BTOEHOLD = (W6, M5), GEARDIF = M6, LSIZE = relative size of the bidder

and the target company, CYCLE = measuring the economic activity, SINGLE = measure the effect of
multiple bids, CASH = payment made in cash, OUTLIER = solving outlier problem in the data.
4.6.3 MAIN RESULTS
Holl and Kyriazis (1997) find that there are significant gains for both the target firms and the bidders of
roughly 3.1 percent; 21.6 percent excess gains for target, and, 137.1 to 139.5, i.e. 2.4 percent excess of
gains for bidders, during the month -1 and bid month respectively. The overall results from hypothesis
for ‘wealth’ and ‘mood’ equations are mixed;
From the wealth equation point of view - it has been revealed that there is a wealth creation activity
being observed for the target firms through the bid resistance behaviour of management, there is a
strong indication of existence of managerial synergy, with out any evidence of operational and
financial synergies, and, the indication of strong monitoring behaviour by large shareholders.
From the mood equation point of view – it has been observed that the expected wealth gains process is
positively related to bid resistance, there is a liking behaviour of target management for the
conglomerate bids, and, the personal managerial independence lemmatized due to the existence of
relationship between the bid response and both the leverage levels in bidder firm and managerial equity
in the target firms.
4.6.4 CONLUSIONS
Holl and Kyriazis (1997) structured their work by modelling the determinants of, and relationship
between, wealth creation and bid resistance, on the basis of sample of successful takeovers bid in U.K.

They conclude that there is a direct significant impact of bid resistance on wealth creation process,
along with the indication of positive gains for the target firms on the bid resistance in the ‘mood’
equation. As far as, existence of various synergies is concerned, there is a strong indication of presence
of managerial and financial synergies, along with an exercise of a strong monitoring done by large
shareholders.

Ajit Singh (Sep., 1975) “Take-overs, Economic Natural Selection, and the Theory of The Firm:
Evidence from the Postwar United Kingdom Experience” The Economic Journal, Vol. 85, No.
339.,pp. 497-515.
Singh (1975) work has two main purposes; prime purpose is, inclusive to boom in an activity of
takeovers between 1967 and 1970, to examine the way of selection procedure of amalgamation activity,
under the ever-changing economic condition, during the post-war period in U.K. Secondary purpose is
to further examination of the results implications for; assessing the mergers efficiency in establishing
the resources in an economy; and, for the theory of firm and theory of economic ‘natural selection’, by
considering the entire period of 1955-70.
Singh (1975) construct a data comprises of all quoted companies in four U.K. manufacturing industries
during the period 1963-70. The source of data is the Department of Trade and Industry’s standardised
accounting records.
Singh (1975) designs his research by comparing the records of both the categories, of the acquiring &
takeover firms and surviving and takeover firms, to find out natural selection of takeover process.

Further more, the care is taken that the records of both of the categories must be compared on both the
univariate and multivariate basis.
Singh (1975) also uses different variables for each of the quoted firms in a data over a different time
intervals, which either individually or in combination may influence a firm’s probability of being
acquired. These can be summarized as; Profitability, change in profitability, growth, liquidity, gearing
ratio, and size.
4.7.3 MAIN RESULTS
Singh (1975) obtain interesting results about the characteristics of takeovers and surviving companies
during the period 1967-70 and further compares it with the 1955-60s’. He finds; under univariate
analysis - the takeover activity is faster in 1967-70 as compared to 1955-60, further more multivariate
analysis – over a results of 105 different combinations of variables also helps in reducing the
misclassifying probability effect of a firm, as taken over or surviving, up to 3%. More over, results
from the 1967-70 are similar with the 1955-60 in terms of the probability of acquisition of firms
declined with the increase in the size of the firm.
Singh (1975), under profitability deciles category, also finds the firm that falls in three lowest
profitability deciles, have one and a half chance of being taken over, during the 1967-70, and it is found
to be very close with the over all pattern of 1955-60. How over the characteristics of acquiring and
acquired companies during late 1967-70, in terms of size, growth, profitability, liquidity, is much better

as compared to 1955-60. In terms of improvement in profitability during the period 1967-70, acquiring
firms shows slight incline in the profitability graph, where as acquired company shows decline.
Singh (1975), finds out that the takeover mechanism is more related to size than that of profitability. In
the larger organization, takeover process encourages salaried managers to concentrate on size aspect of
the firm rather than the profitability maximization. This is why takeover mechanism has a lesser
support for the theory of economic ‘natural selection’. Further more, the researcher also observes that
profitability of amalgamating firms relative to their industry average seems to decline.
4.7.4 CONLUSIONS
Singh (1975), after investigating the data comprises of all quoted companies in four U.K.
manufacturing industries for the years 1963-70, concludes that, although the acquired and acquiring
firms are different in characteristics, but a considerable amount of overlapping do exist between taken-
over and acquiring firms. Moreover, there are evidences of a weaker discipline in taking over activity,
along with the fact that mergers activity seems to have a negative impact on the profitability. In brief,
for larger firms, the study does not seem to support the theory of economic ‘natural selection’, rather
than seems to support new managerial and behavioural theories of firm.

M. S. Kumar (Mar., 1985) “Growth, Acquisition Activity and Firm Size: Evidence from the
United Kingdom” The Journal of Industrial Economics, Vol. 33, No. 3., pp. 327-338.
Kumar (1985) evaluates new evidences on the relationship between size, growth, and acquisition
activity of some 2000 quoted companies in United Kingdom, during the period of 1960-76. The main
purpose of the research is to study the relationship between size and growth, by using various variables,
and give comprehensive evidence on it. The distinctive part of the work is that the data period, under
investigation, hasn’t been systematically considered before this search work. The secondary objective
of the study is to get the results from the relationship between the size and growth by acquisition.
Kumar (1985) obtains the data from the Company Accounts Data-bank in Cambridge, which is regard
to be the best source of information provider on U.K. quoted companies. Due to the vast merger waves
in the 60s and early 70s, the data is left with the small proportion of the firms, which is, further, divided
over three sub-periods; from 1960-65 , population I consists of 1747 firms, from 1966-71, population II
consists of 1021 firms, and from 1972-76, population III consists of 824 firms. The variables for each
firm, under the ‘Size measures’ and ‘Growth measures’, comprises of ; Net Asset, Physical Asset,
Equity Assets, Employees, Sales, Total Growth, Growth by acquisition respectively. Where as, Law of

Proportionate Effect (LPE) is being used as the standard model under this framework.
Kumar (1985), adopts the OLS method technique in order to find out the systematic relationship
between the firm size and growth. The researcher obtains main results for growth, after estimating the
following equation, by using OLS method;
Log (Si, t / Si, t-1) = α + β log Si, t-1 + γ log (Si, t-2) + εit
Where as;
S, represents the size of the firm, t, represents time period of 1976, t-1, represents time period of 1971,
t-2, represents time period of 1966.
For examination of effect of size on growth by acquisition, following equation is being constructed;
(A)ġi,t = α + β log Si,t + γ(A)ġi,t-1 + εi,t
Where as;
Si,t, represents firm size in 1966 or 1972, (A)ġi,t, represents acquisition growth over the period 1966-71
or 1972-76, (A)ġi,t-1, (A)ġi,t-1, represents acquisition growth over the period 1960-65 or 1966-71.
And, for the size-acquisition relationship, equation fitted is of the following form;
(A)ġi,t = α + β log Si,t + εi,t
Si,t, represents firm size in 1960, 1966 or 1972, (A)ġi,t, represents acquisition growth over the period

1960-65, 1966-71 or 1972 -76.
4.8.3 MAIN RESULTS
Regarding growth-size relationship, Kumar (1985), after fitting the equation on the population of the
firms surviving during the period 1960-71, and 1966-76, finds out that there is an indication of
negativity of the co-efficient on opening size, during the earlier period, which is different in results to
that work done by Singh and Whittington (1975). One of the main arguments, in this regard, is put
forward by Ijiri and Simon (1977), is the difference in persistence growth level rate between acquisition
and internal growth. The researcher also finds out even if there is no indication of increase in the
capital/labour ratio of larger firms, but they do posses growth rate in sales, over an observed period.
Where as, for the smaller firms, there is a faster growth rate recorded in both employment and capital
employed activity.
Regarding the effect of growth-size by acquisition is concerned, Kumar (1985) finds that there is a
positive relationship between acquisition and size during period 1960-71, but, a negative one during the
period 1966-76. He also finds out that the firms engaged in the manufacturing industry having negative
size-acquisition relationship.
Regarding the size-acquisition relationship, Kumar (1985) finds that there is negativity exists in the
relationship between the size and acquisition among the non-manufacturing firms, for first two periods,
where as, a week negative relationship among manufacturing firms. Further more, there is evidence of

over all uniform growth rates for larger firms as compared to smaller firms.
4.8.4 CONLUSIONS
Kumar (1985) concludes, after investigating the data of over 2000 quoted companies in Britain over a
period 1960-76, that, firms engaged both to manufacture and non-manufacture industry, having a mild
negative growth tendency related to size. There is also an evidence of persistence week relationship
between the size and growth by acquisition only for the firms in manufacturing sector. Furthermore,
there is low level of persistency in acquisition growth being found as compared to the total growth,
with the existence of inverse relation ship between firm size and acquisition growth.

Andrew P. Dickerson; Heather D. Gibson; Euclid Tsakalotos, “The Impact of Acquisitions on
Company Performance: Evidence from a Large Panel of UK Firms” Oxford Economic Papers,
New Series, Vol. 49, No. 3. (Jul., 1997), pp. 344-361.
The main purpose of the work of Dickerson, Gibson and Tsakalotos (1997) is to evaluate the impact of
merger on company’s performance, by using the data of UK-quoted companies, involved in merger and
acquisition activity from 1948 to 1977. Another purpose of this research paper is to examine the pattern
of growth trend in terms of returns for shareholders in an activity of mergers and acquisitions by keeping
in view the takeover activity at a record bases in the recent past. Further more, this paper also shed some
light on profitability issue by examining differential returns to internal growth and acquisition growth.
Dickerson, Gibson and Tsakalotos (1997) hypothesize the effect of mergers and acquisitions on the
performance of acquiring companies. They have chosen the large panel data of UK companies over a
longer period to observes firms involves in merger process of before and after acquisition activity. The
process mainly involves by comparing acquirers with both non-acquirers and acquiring companies,
where the sample period posses the recession and boom of acquisitions.

The divided information about the each firm’s sample is the Cambridge/DTI Data bank of annual
company accounts (File I: 1948-77) which consisting of the large sample of UK-quoted companies.
After introducing new requirements to firms, to be quoted companies, in 60s and 70s, the researchers
have to cut-down the sample and many ‘small’ companies short-listed from the list. Hence, 2,941
companies being left in the data of over a duration of 30 years, out of that 21 percent made at least one
acquisition with roughly an average of 2.35 per company.
In-order to calculate the profitability performance of the sample firms, as measured by its rate of return
on assets, following relation ship is used;
Лit = βЛit-1 + ∑δjSIZEjit + ηLEVit + θ(L)Git + αi + γt + εit
Where as;
Лit, is the profitability of company i in time t , β, captures the degree of persistence in profits, LEVit, is
the debt/net assets ratio, θ(L) is any delay effect of company growth on performance, Git is a growth of
net assets, αi, is company effect, γt, time-fixed effects, SIZEj, represent dummies for firm size.
Dickerson, Gibson and Tsakalotos (1997) determine the impact of acquisition in two different stages. In
the first stage they include simple shift dummy (Ait), which determines the permanent effects resulting
from acquisition. Three regressions are being applied; to record the rate of return of acquirers relative to
non-acquirers, to examine the effect on the mean rate of return for firm specific effects and that of time
specific effects. More over, (AGit) i.e. acquisition growth, and (IGit) i.e. difference of total actual

growth and acquisition growth, indicate the impact of merger on profitability during the takeover period.
4.9.3 MAIN RESULTS
Dickerson, Gibson and Tsakalotos (1997) find that the re is a diminishing effect of acquisition on the
company performance during the amalgamation period in UK. There is a non-linear relation found to
exist among the profitability and the size, along with the indication of a negative influence of debt on
profitability. It has also seen that there is a positive relation ship exists between growth and profit i.e.
higher growth leads to higher profits.
In examining the impact of acquisitions on profitability, resulting out of the basic model, there is a clear
indication of lower rate of return on assets of acquirers as compare to assets of non-acquirers. For
acquires there is over all reduction in the rate of return by 2.90 percent points per annum relative to non-
acquirers, where as 17.14 percent in gains being recorded for the non-acquirers. Moreover, when the
acquisition impact on the profitability is being considered through two different prospective i.e.
acquisition growth and internal growth, the combine effects of both of them is turned to be negative,
with the lower profitability of 1.86 percentage points of over all acquisition impact.
4.9.4 CONLUSIONS
Dickerson, Gibson and Tsakalotos (1997) work is considered to be the first study ever done during that
period in which the data of the large cross-section of UK firms is being used to examine the impact of
acquisitions. They conclude that there is no, rather, detrimental beneficial effect of acquisition on the

company performance as measured by profitability, after the acquisition, by comparing the previous
performance of the companies with that of non-acquiring firms. They also agreed with the results of
some American based studies, which suggest that, when measured by profitability, mergers activity fails
to enhanced performance of the company. Moreover, even with the record level of takeover activity in
London equity market being witnessed, the findings suggest a long term negative effect on profitability
in the U.K.

Michael Firth (1978), “Synergism in Mergers: Some British Results” The Journal of Finance, Vol.
33, No. 2., pp. 670-672.
Firth (1978) examines the impact of mergers and acquisitions on various synergies, during the period of
1972 to 1974, in Great Britain. The main purpose of the work is to investigate the test for synergism in
mergers, by replicating the methods of Haugen and Langetieg (1975), on British merger data.
Firth (1978) construct a data comprises of 150 mergers in U.K. during the period 1972-74. The
distinctive part of the data is that - all the acquired and acquiring firms, involved in 150 mergers, were
quoted on the British United Stock Exchange; consideration done on the bases of equity exchange; and,
both of the kinds were not involved in else where mergers activity during 48 month period of takeover.
Further more, the researcher also match the non-merging quoted firms with the merging firms and
construct a ‘control group’, in which firms are mainly of same size and industry.
Firth (1978) designs his research by following the approach of Haugen and Langetieg (1975), to find out
whether there is any hint of change in a activity, which generate returns to merging group and the
control group, and if, the ‘changes’ of one group is different from the other one.
Firth (1978) constructs the pre-merger period (month 1 to 24) and post merger period (month 25 to 48)

for both the ‘merger group’ and ‘control group’ and uses the security returns generating process, as a
market model, purposed by Sharpe (Jan, 1963);
ѓj = αj + βjŔm + ēj
ѓj, expected return from the security j, Ŕm, market return.
4.10.3 MAIN RESULTS
Firth (1978) examines the tests which have revealed that there are no significant differences in the return
generating process for both the groups in observatory data comprises of 150 mergers in U.K. Further
more, the lack of significant differences between the ‘control’ and ‘merger’, in terms of ‘changes’
occurs, is consistence to that of result construct by Haugen and Langetieg on American data.
Firth (1978), also carries out additional tests, based on the same pattern of work of Haugen and
Langetieg (1975), in order to examine the possibility of abnormal discrepancies, if exists, in the values
of α and β, and finds no significant differences between the ‘merging’ and ‘control’ group results.
4.10.4 CONLUSIONS
Firth (1978) concludes, after investigating the data, comprises of 150 mergers of all quoted companies in
Britain, that there is no evidence of existence of synergism created by combining firms over a period
1972-74. There is not any clue of differences being observed from the process, which create returns for

both the merging and non-merging firms. In Brief, the only effect of mergers, during the observed
period, is that of size increasing effect, with the little evidence of changes in return generating pattern.

John W. Hunt (Jan., 1990) “Changing Pattern of Acquisition Behaviour in Takeovers and the
Consequences for Acquisition Processes” Strategic Management Journal, Vol. 11, No. 1., pp. 69-77.
Hunt (1990) conducts his work in examining the very fact that, despite the fourth time booming merger
activity in 20th century, since 1985 in U.K. and America, there is a recorded figure of 50 percent failures
in acquired accompanies. The main purpose of the study is to find out this failure rate, by using
Kitching’s work (1967, 1973) as a starting point, against 40 U.K. based cases, covering a period of 1980
to 1985.
Hunt (1990) selects the data, comprises of 40 U.K acquisitions by public companies, from two sources,
i.e. ‘The Financial Times’ list and the list from ‘Acquisition Monthly’, having a bid price of £2 million
each during 1980-85. The collection of data comprises of three separate modes of activities; searching
and reviewing the annual reports; studying of city analysts comments; and, finally, interviewing the
buyers and sellers negotiator, comprises of 3.6 years time span between the interview and acquisition.
Hunt (1990), adopt three different methods in-order to assess success and failure; calculation of returns
on investment even after a closure; assessment of acquisition impact, at bid time, on equity price of

shares of buyers and sellers; and finally, asking about the chances of success from involved managers.
Further more, the most important thing to be considered is that the sample data contains out of total bids,
seventy percent are initiated by the buyers and remaining thirty percent are initiated by the seller.
4.11.3 MAIN RESULTS
Hunt (1990), observes that there is 55 percent of successes and 45 percent of failures from the total 40
U.K. merger cases under observation over a period of 1980-85, similar to most past studies of
acquisitions. It is being discussed by Lorenz (1986) in one of his releases; “Takeovers are at best an each
way bet”.
Hunt (1990) compares the results of the 40 British cases with the Kitching’s hypotheses in order to rate
the success;
First hypothesis - relates high risk of failure with concentric acquisitions than that of horizontal
acquisitions, which is not supported by the British sample.
Second hypothesis – relates above normal failure rate, if seller’s turnover is < 2 % of that of the buyer,
which is supported by British sample with the failure rate of 67 per cent is being recorded.
Third hypothesis – relates majority of failures with change in the organisational format, at least once,
after acquisition, which is not supported by British study, with 22 percent of cases of failure.
Fourth hypothesis – relates failure with seller-initiated acquisitions than with the buyers, which is not
supported by British study, with an evidence that mostly the success full acquisitions are seller initiated
once (for instance, under the British sample of 40 cases, success rate of 50 % is being recorded).

Fifth hypothesis – relates growth motives more with acquirors of healthy companies than those who
acquire un-healthy once; under that, out of 40 British cases 18 % ranked unhealthy, 42% ranked as fairly
healthy, and 40% ranked healthy, which is supported by the British study.
Sixth hypothesis – relates failure by diversifying into new business, not clearly supported by British
study.
Seventh hypothesis – relates success by concentrating into the same business, which is supported by the
British study, with the 75 % of success rate out of 40 cases.
More over, the researcher also gives an insight on the scenarios of success, mainly three, as suggested by
British study, which concludes that the process involves under one context is not relevant to the success
in another.
4.11.4 CONLUSIONS
Hunt (1990) uses the hypothesized relationship of Kitching’s work (1967, 1973) between the failure and
success and examined it against the 40 U.K. cases of mergers. He concludes that the variables like buyer
strategy, health of seller, compatibility of industry and size etc, are insufficient to solve the riddle of
success or failure of acquisition. However, it has been observed that key to success is hidden inside the
behavioural process, mainly includes targeting, negotiating and implementing techniques, in taken-over
process.

CHAPTER 5:
INTERPRETION AND IMPLICATION

5.1 INTERPRETING MAIN RESULTS
These ten academic articles including Franks, Broyles and Hecht (1977), Firth (1980), Murray (1991),
Danbolt (2004), Holl and Kyriazis (1997), Singh (1975), Kumar (1985), Dickerson, Gibson and
Tsakalotos (1997), , Firth (1978), Hunt (1990), demonstrate the different results of effect of
amalgamation movement over issues involve; shareholders returns, size and growth, sources of wealth
creation, performance and profitability. All research papers under review involve different
assumptions, methods, sample data and so on, but with the single motive of critically analysing the way
the activity of mergers and acquisitions behave over the period of 4 to 5 decades.
Those research papers out of ten, which are mainly concerning the issue of returns to targets and
bidders firms’ shareholders, give evidences of significant differences in the levels of abnormal returns,
though positive in nature, under different study patterns. However, only, Dickerson et al., (1997) has a
different point of view, who evaluates that there are no evidences of positive trend in the growth for
returns after the acquisition activity, rather, he finds out a long term negative impact on the profitability
graph after takeover activity.
The research paper of Kumar (1985), which is mainly concerning the issue of size and growth of firms
of both the manufacturing and non- manufacturing industry in relation to acquisition, put forward
interesting results. He finds only the existence of persistence week relationship between the size and
growth by acquisition in manufacturing industry’s firms.
As far as market efficiency is concerned, Murray (1991), concludes that the tendency of Irish market,

in anticipating the forthcoming events of takeover bids, is marginally slower as compared to its larger
neighbours i.e. London Stock Exchange markets and New York Stock Exchange markets. However,
there is a similarity in the results; concern with increasing pattern of victim company prices; and, that
of excessive positive returns prior to formal announcement of bids, as reported in earlier studies
However, the biases in one or two of the articles may be another way of explaining the results – the
time series of acquisition distribution may regard as one of the biases can be seen in Firth (1980) work.
He includes year dummy variables in the regression analysis, and finds out that takeover activity has a
positive impact on both the targeted firm’s shareholders and the corporate profitability. Another
research article which possesses the bias factor is by Dickerson, Gibson and Tsakalotos (1997), in
which they include the size dummies variables to find out the profitability performance of the sample
firms. They find that there is rather a detrimental beneficial effect of takeover.
Another interesting result, regarding the investigating the consequences of failure or success rate during
the boom takeover period in Great Britain, by Hunt (1990), finds that the key to success is hidden in
side the behavioural process during the acquisition activity. However, he doesn’t able to put forward a
precise conclusion regarding 50% failures in acquired firms, by investigating the 40 cases of mergers
during the 4th boom period of takeover in U.K.
5.2 IMPLICATION FOR SHAREHOLDERS
The evidence from the articles related to the returns pattern to shareholders from the mergers and

acquisitions activity is rather straight forward. For instance, Franks, Broyles and Hecht (1977), Firth
(1980), Murray (1991), Holl and Kyriazis (1997), Danbolt (2004), work report the positive returns to
the shareholders of the target firm, with the exception of only one study done by Dickerson et al.,
(1997), who finds out rather diminishing trend in the rate of returns generate from the amalgamation
movement. Thus there is a clear indication of no gains, even losses in some cases, for the share holders
of bidder firms involved in the process of takeovers.

CHAPTER 6:
CONCLUSION AND LIMITATION

6.1 CONCLUSION
The purpose of this dissertation is to critically review the performance puzzle of mergers and
acquisitions over a past few decades, mostly on British results with minor results covering Irish
experience. It has been seen in the recent past that, with the progression of takeover activity, the debate
over its advantageous aspects has considerably increases. However, past extensive research has revealed
that, as far as the authenticity of the fact that the transactions of M& As do create value is concerned,
there is a failure in this regard. This study attempts to explore the impact of mergers and acquisitions on
the bases of empirical evidences, over a past few decades, and further examine them in relevant to the
issues of ; value creation process and the bid resistance relationship, size and growth, performance and
profitability, and so on.
The literature review method is being employed in this paper, and ten academic research papers, related
to this topic, are being used. These ten academic articles including Franks, Broyles and Hecht (1977),
Firth (1980), Murray (1991), Danbolt (2004), Holl and Kyriazis (1997), Singh (1975), Kumar (1985),
Dickerson, Gibson and Tsakalotos (1997), Firth (1978), Hunt (1990), demonstrate the different results of
effect of amalgamation movement over issues involve; shareholders returns, size and growth, sources of
wealth creation, performance and profitability.
After reviewing all the ten research papers, which are being selected in order to provide a
comprehensive analysis over the issues under debate, it is, thus, possible to draw a conclusion that over
all impact of amalgamation activity has generated a mix results in respect to returns to the shareholders

of both the target and bidder. (1980), Murray (1991), Holl and Kyriazis (1997), Danbolt (2004), work
report the positive returns to the shareholders of the target firm, with the exception of only one study
done by Dickerson et al., (1997), who evaluates a diminishing trend in returns after the take over
activity. However, the reasons for positive gains more to shareholders of the target firms, as compared to
the shareholders of the bidder firms, who on an average suffers losses, can not be fully explained due to
the fact that different results, so obtained, from different techniques, methods, data sample, assumptions,
and so on.
Along with that, there are evidences of different results, generates from takeover activity, on the size and
growth, performance and profitability, value creation and bid resistance relationship, under different
environments. For instance, there is evidence, put forward by Kumar (1985), of existence of persistence
week relationship between the size and growth by acquisition in manufacturing industry’s firms. Along,
with that one of the reasons behind the increasing trend in the concentration in industries it that of
disappearing of firms through takeover activity ( Hannah and Kay, 1981).
Form the ten academic articles’ review, it can be concluded that the current literature able to provide a
brief and, to some extend, fruitful knowledge over the puzzling performance of take over activity,
including various issues being discussed so far. However, the results obtained after examining the
different issues under observation can not be termed as a full and final verdict, since the different
techniques, methods, data sample, assumptions, and so on being used in the articles. There fore, it is
highly recommended for the further research in disclosing the facts in this area, in order to fill up the
gap.

6.2 LIMITATION
Like every research, this paper also has to go through some restrictions on its own. Like the research
method used is mainly depending upon the review of the articles, which themselves are limited in
numbers. It is quite impossible to go through all of the articles and have an in depth study in a shorter
allocated time period. The personal knowledge of a writer in selecting the specific articles for the
research work couldn’t be regarded as a full and final verdict and therefore, said to have biases on some
points. Some of the given points resulting out of study is subjective in nature, since the research design
carries writer’s personal preferences. More over, the research work, which is base on the evaluation
process, is comprises of same results on the bases of different methods, and, different approaches in
extracting various results on different issues, proven to be a difficult issue in satisfying the main
objective. In order to fill the gap, which this dissertation could not able to fill, it is highly recommended
that the empirical study is needed in this area of interest.
Hence, it can be said that literature review involves in an activity of drawing conclusions on the bases of
past researches, which lack solid and powerful evidence, unlike the empirical results. Just like this
dissertation, which is comprises of only few academic reviews with the results discussing various issues
under observation, and which can be compared only at a very introductive level.

CHAPTER 7:
BIBLIOGRAPHY

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MSC.

INTERNATIONAL FINANCE & ECONOMIC POLICY [RESEARCH THESIS]

PERFORMANCE PUZZLE OF M & AS:

BRITISH AND IRISH RESULTS OVER FEW DECADES”

DISSERTATION SUBMITTED IN PART FULFILLMENT OF THE REQIUREMENTS FOR THE

AWARD OF THE DEGREE OF MSc IN INTERNATIONAL FINANCE AND ECONOMIC POLICY

CDS – Department of Economics, Adam Smith Building University of Glasgow 1

support, understanding and encouragement throughout all my years of study.

CDS – Department of Economics, Adam Smith Building University of Glasgow 2

ten academic research papers under review.

CDS – Department of Economics, Adam Smith Building University of Glasgow 3

2.1 METHOD AND METHODOLOGY 13

3.1 BEFORE 1914 20

4.1 LITERATURE REVIEW 24

CDS – Department of Economics, Adam Smith Building University of Glasgow 4

4.3.1 PRINCIPAL PURPOSE OF RESEARCH 29

4.4.1 PRINCIPAL PURPOSE OF RESEARCH 33

4.5.1 PRINCIPAL PURPOSE OF RESEARCH 37

4.6.1 PRINCIPAL PURPOSE OF RESEARCH 41

4.7.1 PRINCIPAL PURPOSE OF RESEARCH 46

4.8.1 PRINCIPAL PURPOSE OF RESEARCH 49

CDS – Department of Economics, Adam Smith Building University of Glasgow 5

4.9 LITERATURE REVIEW OF ARTICLE # 8 53

4.9.1 PRINCIPAL PURPOSE OF RESEARCH 53

4.9.1 PRINCIPAL PURPOSE OF RESEARCH 57

4.11.1 PRINCIPAL PURPOSE OF RESEARCH 60

5.1 INTERPRETING DIFFERENT RESULTS 64

CDS – Department of Economics, Adam Smith Building University of Glasgow 6

CDS – Department of Economics, Adam Smith Building University of Glasgow 7

participate in the activity where one company bid for another?

CDS – Department of Economics, Adam Smith Building University of Glasgow 8

during the period of 90s.

CDS – Department of Economics, Adam Smith Building University of Glasgow 9

turned up over considerable period.

CDS – Department of Economics, Adam Smith Building University of Glasgow 10

CDS – Department of Economics, Adam Smith Building University of Glasgow 11

CDS – Department of Economics, Adam Smith Building University of Glasgow 12

2.1 METHOD AND METHODOLOGY

false, only more or less useful” (Silverman, 1994).

known as positivistic model, which includes – recording measurements, describing phenomena,

where ever it is essential (Hussey and Hussey, 1997).

If method, as a technique or procedure, involves a process in which there is an activity of data-

CDS – Department of Economics, Adam Smith Building University of Glasgow 13

problems, suggesting new formulations” (Kaplan, 1973).

should reflect through out the study.

CDS – Department of Economics, Adam Smith Building University of Glasgow 14

applied as a research method of literature review, which is subjective in nature.

2.2 OVERVIEW OF RESEARCH DESIGN

2.2.1 THEORY OF LITERATURE REVIEW

CDS – Department of Economics, Adam Smith Building University of Glasgow 15

more desirable way.

2.2.2 STRUCTURE OF SEARCH

CDS – Department of Economics, Adam Smith Building University of Glasgow 16

2.2.3 FINDING APPROPRIATE ARTICLES

CDS – Department of Economics, Adam Smith Building University of Glasgow 17

dissertation requirement thereby.

CDS – Department of Economics, Adam Smith Building University of Glasgow 18

A GLIMPSE OF M& As ACTIVITY IN UK:

(PRE, INTER, POST-WAR PERIODS)

CDS – Department of Economics, Adam Smith Building University of Glasgow 19

3.1 BEFORE 1914

CDS – Department of Economics, Adam Smith Building University of Glasgow 20

affect the extension process.