1 Master Thesis Merger and acquisitions in small to medium sized enterprises A Quantitative study at the link between pre-merger preparation and post-merger success. MSc Business Administration – Track International Management Name: Thomas Nieves Asensio Student number: 10839267 Date of submission: 25-03-2016 Thesis supervisor: Dr. Ilir Haxhi Second reader: Dr. Erik Dirksen
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Master Thesis
Merger and acquisitions in small to medium sized
enterprises
A Quantitative study at the link between pre-merger preparation and post-merger success.
MSc Business Administration – Track International Management
Name: Thomas Nieves Asensio
Student number: 10839267
Date of submission: 25-03-2016
Thesis supervisor: Dr. Ilir Haxhi
Second reader: Dr. Erik Dirksen
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Statement of originality
This document is written by, Thomas Nieves Asensio, who declares to take full responsibility
for the contents of this document.
I declare that the text and the work presented in this document is original and that no sources
other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of
completion of the work, not for the contents.
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Abstract
This thesis investigates the post-merger performance of merger and acquisitions from a
representative sample of all Merger and acquisitions in the European Union occurring in
2009, all taken place between small to medium sized enterprises (608 SME’s). Using the data
gathered, this thesis was able to investigate the impact of pre-merger factors on post merger
performance in SME’s. Four factors in pre-merger planning are studied through a quantitative
analysis. The results show that some factors in the pre-merger phase do indeed differ in
SME’s compared to large corporations when observing post-merger performance in those
SME’s. This study makes a theoretical contribution to existing literature in post-M&A
performance and pre-merger planning to prove that SME do indeed behave differently in
some areas after they have merged. Our findings showed that there is an indication that an
SME with no previous experience in M&A’s actually has an increased post-M&A
performance. Our main result though was that increased cross-national distance has a strong
negative effect on the performance after a SME has merged. This is consistent with existing
research done on large corporations. Subsequently our findings provide valuable insight for
managers in the field of M&A by recognising the effect of some pre-merger factors and SME
M&A performance. Through this study it became apparent that managers of SME’s who
announce deals, in most instances generally conclude the transaction, which is not the case in
large corporations. . Foremost this thesis is an indication to academics that further research is
needed on this subject, specifically other factors that affect post-merger performance.
Keywords: Merger and acquisitions, SME’s, Pre-merger planning, Post-merger performance
Although the amount of transactions that have taken place have declined considerably
due to the most recent financial crisis, there is strong evidence to suggest there will be a
resurgence in M&A activity as of 2015, this new M&A wave is predicted to be driven by
innovation. This is because firms are focusing on acquisitions that will help move the scope of
their business, sometimes even in a new industry sector (McCrostie, 2015). Cross border
transactions are set to be the basis of these transactions in this new wave, with 86% of the
planned deals to be set in the international market. (Gillespie, 2015;EY report, 2015)
Most theories on M&A were developed almost entirely on large deals involving large
corporations; however, most of the M&A activity valued at $3.5 trillion in 2014 is derived
from Small and medium enterprise2 (SME) transactions (Jansen, 2008). Thus, the previous
research mainly focused on M&A deals of large organisations, neglecting the majority of
M&A’s taking place in the European Union (and the USA). So even though SME’s play a
significant part in the total amount of M&A transactions worldwide, it is unclear whether the 1 Although it is technically incorrect, the term merger, acquisition and M&A will be used synonymously in this 2 According to Extract of Article 2 of the Annex of Recommendation 2003/361 of the European Commission. The category of micro, small and medium-sized enterprises (SMEs) is made up of enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding 50 million euro, and/or an annual balance sheet total not exceeding 43 million euro.
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same rationales may also apply to small to medium size businesses (Weitzel and McCarthy,
2009). Therefore, in the current study, we will look at factors that influence an M&A in the
context of SMEs.
There are many factors one can consider to have an effect on M&A success. Epstein
(2004) identifies seven critical factors that contribute to the success of post-merger
performance (e.g., is pre-merger preparation) and argues that the actual implementation of
merger strategy through pre-merger preparation (together with post-merger integration)
appears to be least understood with stakeholders involved in a M&A transaction. The effect of
pre-merger phase is seen as a missing element in existing M&A research (Dikova et al., 2009)
Building on previous literature, in this study, we identify four factors that can be considered
factors of success in the pre-merger phase; the public take over process, culture, industry and
experience. Due to this lack of research on pre-merger preparation, this research paper will
take factors in the pre-merger phase that have an effect on M&A performance in large
corporations and see what effect they have on M&A performance in an SME, by trying to
establish if these factors for success in M&A’s also hold for SME’s.
Pre-merger activities affect the performance of the newly merged SME’s. These
factors, that have a known effect on M&A performance in large corporations, may have a
different effect on SME’s. (Weitzel & McCarthy, 2009; Bauer & Matzler, 2014). Experience
in M&A for example is more prevalent in large corporations and is not a given for SME’s,
and this could contribute to a difference in outcome. This leaves an important gap and this
means the relation of M&A’s to SME’s performance needs to be investigated further. As most
research has been done with data regarding large corporations, this research is an exploration
of the factors that influence post-merger performance for SME’s.
This study attempts to investigate to what extent known pre-merger phase factors of;
cross-national distance, experience, industry and time between deal announcement and deal
completion have, on the outcome of post-merger performance in a SME. Performance will be
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measured in terms of total asset growth of the SME. From a theoretical perspective, the
overall effect of all previous topics mentioned is unclear, and clarification depends upon
empirical investigation because the behaviour and success of M&A’s by SMEs may differ
significantly to large firms.
The purpose of this research study is to fill the gap by testing known theory on M&A
performance in large corporations and putting it into practise for SME’s, to explore possible
factors in the pre-merger phase that positively influence post-merger performance by SME
companies.
RQ: To what extent do selected known pre-merger success factors affect post-merger SME
performance?
In this study we analyse if there is a relationship between factors that have an outcome
on the growth in total assets in an SME and therefore also on the post-merger performance
using a dataset from Zephyr, a database from Bureau van Dijk. This is the most
comprehensive database on deal information globally with information on a 120 million un-
listed companies worldwide, making this database suitable for the data on SME’s. (Bureau
van Dijk). The sample includes 608 SME’s in the EU that have gone through a merger and/or
acquisition in the period 2009-2015. The aim is to identify the effect of selected factors in the
pre-merger phase on post-merger performance. Our main findings are that some pre-merger
factors have a different effect in SME’s. Although some pre-merger factors have much less
effect on post-SME M&A performance than others, these findings will be discussed in detail.
Even though many academics that have studied M&A generally portray M&A success
as complex and multidimensional, most research focuses only on a few performance
indicators (Meglio & Risberg, 2011), while excluding possible salient factors. Additionally
there are only limited studies regarding pre-merger activities with SME’s, even more so the
period from deal announcement to deal completion. In this phase, if prolonged deal making
occurs certain complications arise that influence the success of the merger. It offers more
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room for competitors to initiate a bidding contest resulting in a deferment of efficiency gains
of the potential deal. (Bainbridge, 1990; Luo, 2005)
Furthermore, given that SME’s play such a big role in the European economy and that
the pre-merger process during the M&A deal has the least understanding by stakeholders,
better insights into this, and the resultant on the effects on the M&A performance are required
(Epstein 2004, Weitzel & McCarthy 2009)
The thesis is organised as follows: First, we give an overview of the literature on
M&A’s, and the pre-merger phase in particular by developing a set of hypotheses on how it
may relate to the performance of SMEs. Further, we present the data and method followed by
a discussion of results and main implication of our research. Finally, we conclude with
possible further research on M&A performance and SME’s.
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2. Literature Review
2.1 Merger and Acquisitions
Merger and acquisitions continue to be a highly popular form of corporate development. In
2014 M&A activity was valued at $3.5 trillion (Thomson and Reuters). This value represents
the biggest year for M&A activity since 2007, the last year before the financial crisis hit the
world. As of April 2015 the global M&A volume stood at $1 trillion, up 19% from the
previous year on year period, according to Dealogic, an international financial software
company. In early 2015 the 8th annual Brunswick proprietary database survey consisting of
115 M&A practitioners across Europe, North America and Asia also concluded that, when
looking at these figures, that there is an indication that M&A activity is expected to grow in
the forthcoming years (PRNewswire, 2015).
However, there is a paradox that remains, whilst M&A deals are a popular tool for
development in a firm, there has been a mixed performance in results to the broad range of
stakeholders involved in these deals (Cartwright & Schoenberg, 2006). Agrawal and Jaffe
(2000) found that shareholders of the target company generally enjoy positive short-term
returns but the long-run benefit to investors acquiring firms is more uncertain. Furthermore it
was found that managers of target firms depart more quickly after an acquisition (almost 70%
leave within 10 years) than managers that joined the firm after the acquisition (Krug, J. and
Aguilera, 2005). It has been reported by managers of acquiring firms, that more than half of
M&A are considered unsuccessful against the original objective set to them (Schoenberg,
2006).
Academics have been forced to ask why despite their high rate of failure, M&A waves
keep on occurring with such a magnitude. A cause for this, by Kummer and Steger (2008), is
that corporations are constantly under pressure to realise growth (both internally and
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externally) together with the arrogance of executives, who have unrealistic expectations,
themselves, about a potential merger or acquisition transaction. Themes that are common in
M&A literature are; identifying specific factors that create value during each of the M&A
phases, reasons why firms/managers choose to undergo M&A and reasons why M&A fail or
succeed.
2.2 SME’s and M&A’s
The SME plays a central role in the European economy. They are a major source of
entrepreneurial skills, innovation and employment. In the enlarged European Union of 28
countries, some 23 million SMEs represent 99% of all enterprises in the EU, the equivalent of
28% of the EU GDP. They also provide around 90 million jobs - 67 % of total employment in
the EU (Muller et al., 2015).
The sixth merger wave, characterised by shareholder activism3, private equity4 and
leveraged buy out5 emerged in 2003 and ended in 2007 due to the financial crisis, was mainly
driven by SME’s (Salvato et al., 2007). The most obvious reason why little attention has been
devoted on SME’s is that they are not publicly traded and therefore it is difficult to obtain
reliable data for academics to do research.
It is relevant and important to focus on SME’s because they are the backbone of the
European economy and M&A theories established to date almost exclusively represent the
other 1 % of enterprises of the EU economy, which are the large global corporations. This
thesis will incorporate this important but often overlooked sector of the EU economy, by
explicitly considering the activity by SME’s within the M&A industry.
3 Shareholder activism: is a way in which shareholders can influence a corporation's behaviour by exercising their rights as owners (investopedia) 4 Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies that result in a delisting of public equity (investopedia) 5 LBO: The acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition.(investopedia)
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Large Corporation and SME’s differ in many aspects such as; they often have a much
simpler governance structure because often the manager or CEO of the firm is also the main
shareholder. This difference immediately lessens agency problems, which generally happens
in M&A integration (Jensen, 1986). The agency problem generally refers to a conflict of
interest between the firm’s management and the firm’s stockholders. Furthermore,
corporations undergo larger coordination problems then SME’s. (Williamson, 1975).
According to Weitzel and McCarthy (2009) the three main differences of SME’s
compared large cooperation’s in terms of M&A activity are as follows; 1) they are more
likely to rely on M&A as external growth, 2) they are more likely to withdraw from a deal as
SME’s are more flexible, 3) and that SME M&A are more likely to be financed with debt.
Until now there has been a considerable amount of literature that looks at the
differences between the size of corporations and post-merger performance. Gugler et al.
(2003) based on a large research panel of more than 45 thousand global and US mergers in
the year 1981 to 1998 examined the post-merger performance effects in terms of profitability
and sales. These authors concluded, “ One might expect mergers between small firms to be
more likely to increase efficiency by creating economies of scale and scope”. Their research
findings suggested that sales decreased when large firms merged and increased when small
firms merged. In a later study of Gugler et al. (2012) they found that post M&A performance
during the different merger waves are considerably different for listed and un-listed
companies. In a study done by Moeller et al. (2004), where they took a sample of over 12.000
acquisitions by listed firms during the period 1980 till 2001, they concluded that smaller
businesses perform better after M&A’s than larger ones. A serious limitation to this study is
that it only incorporates listed firms and therefore neglects SMEs
Similarly, another study from Moeller et al. (2005) found that mergers whose values
exceed $1 billion decreased the acquirer shareholders value by a staggering $7.38 per $100
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invested. Dutta and Jog (2009) found out that firms of a relative large size that make an
acquisition, underperform in the long run, by a negative 49% over three years.
To summarise, empirical evidence states it is quite clear that there is a difference in
post merger performance when regarding the size of the company. The results in most of the
papers provide evidence that there is a negative relationship between the company size of the
acquirer and M&A performance. Large corporations can destroy the synergy of a newly
formed firm, as they often bring more integration and management problems with them.
The relationship between company size and performance has been a subject of study,
but small corporations are not the same as SME’s. The performance of SME’s in M&A has
been largely neglected by academics. Therefore this paper would like to bring a focus on even
smaller unlisted firms and the effect on post-merger performance.
2.3 M&A performance in an SME
M&A performance and success, the dependent variable of this study, is a largely discussed
topic in M&A literature. Strategic managers, corporate financial managers and organisational
behaviour academics have studied it for decades. For example Kaplan (2007) describes and
evaluates in his paper the different measures used by financial economists to evaluate the
success of M&A performance by looking into a range of studies.
The fact that most M&A fail during each M&A wave is well documented in research
findings. This success inconsistency with M&A’s prompts academics to investigate further on
M&A performance. Zollo and Singh’s paper (2004) is a study conducted primarily in the US
banking industry. This study tests how different approaches to the post acquisition
management and different levels of knowledge in managing the integration process of the
firm affects different types of performance outcomes.
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They found that there is much discrepancy between academics and both their definition and
measurement of performance. Meaning that even today there is still much disagreement
within many academic disciplines how to measure M&A performance (Zollo & Meier, 2008).
Essentially there are five-performance evaluation measures a used in the M&A field:
change, making deal financing more difficult. Finally, a better understanding of time to
completion matters not only for firms that merge but also for their competitors and investors.
The Competitors may profit from this in the product-market setting from the prolonged
takeover process due to increased perceived uncertainty by suppliers, customers and delays in
innovative undertakings by both the merging firms. Financiers on the other hand may gain by
more rapid deal completion by speculating on deal completion8, by benefitting from faster
settlement of the deal in question (Luypaert & Measeneire, 2015).
6 Termination fee: A common fee used in takeover agreements if the seller backs out of a deal to sell to the purchaser. This fee is required to compensate the prospective purchaser for the time and resources used to facilitate the deal (Investopedia), 7 Acquirer Lock up: A legally binding contract between the underwriters and insiders of a company prohibiting these individuals from selling any shares of stock for a specified period (Investopedia) 8 Also called merger arbitrage
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Lengthy duration of the acquisition process indicates problems, like those mentioned
above, in closing the deal. The problems might impact future returns for the newly merged
firm and therefore impede growth.
Former studies take acquisition duration and performance indirectly into consideration, such
as Dikova et al.’s (2009) paper that displays a whole list of variables that affect the
acquisition duration. This list included; type of financing, public status of acquirer and target
and cross-border distance. Even though it concludes by saying that SME’s take less time in
the public take over process, it remains to be found if within SME’s, acquisition duration has
a direct effect on post merger performance. One could therefore look closer at the time taken
between the deal announcement and the deal closure and investigate if it has any relation to
the performance in an SME.
H1: The more time taken between announcement time and deal closure, the lower post-
merger performance is for the acquirer
3.1.2 Cancelling an announced deal and SME performance
Empirical evidence suggests that firms cease up to 25% of their merger and/or acquisition
attempts at some point in the negotiation process (Holl & Kyriazis 1996). Observed reasons
for this are opposed decisions by courts of law or regulatory agencies (Hotchkis et al., 2005).
Cancelling a deal that has been announced publicly can severely damage the credibility and
the reputation of any company, due to loss of faith. When an announced deal does not
succeed, it can also entail a breach of contract, which could incur heavy penalties (Luo,
2005).
Dikova et al (2009) found that in their sample, a significant percentage of deals that
are announced in the public take- over process are abandoned; this only concerned large
corporations and SME’s. Furthermore the following pre-merger factors still to be discussed
all too have an effect on the probability of deal completion. As this study only looked at
public companies, this paper hypothesis the following; as the effects of cancelling a deal are
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universal and influence SME’s in the same way as corporations, incurred penalties and a loss
of credibility for stakeholders have a similar effect for SME’s as corporations; therefore we
hypothesise the following;
H2: When a deal is announced but cancelled, it will affect the acquirer’s performance
negatively
3.2 Cultural and Cross-national distance and SME M&A performance
Cultural distance has often been argued, but not so often researched to be an influence in
M&A. Cultural distance can be the cause of confusion, distress and even hostility between
merging parties (Stahl & Voigt, 2005). Cultural difference is also a factor that affects M&A
performance. Some research schools believe that cultural differences between firms going
through an M&A could create major complications in integration, whilst others believe that
cultural differences can be a source of value creation and learning (Stahl & Voigt, 2008).
King et al. (2004) considered that cultural distance is a major contributor to the high failure
rate in M&A, which is often reported in literature. The ability to integrate culturally is even
considered by some executives of major European multi-nationals to be of more importance
to the success of an M&A than strategic and financial factors (Cartwright & Cooper, 1996).
It is a fact that countries differ from one another; these differences include cultural,
political and economic differences. Academics have called this cross-national distance.
Cross-national distance is a key concept in the field of management and is important that it
considered in the pre-merger phase when it decides to merge with a firm across it own borders
(Berry et al. 2010).
A study done by Gugler et al. (2003) did not find significant difference in return (i.e.
performance) between cross-border M&As and domestic M&As. However Moeller and
Schlingemann (2004) found an indication there is a difference amongst international and
national M&A’s. Particularly their findings showed that the acquirer’s previous M&A
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experience considerably decreases return on their shares and operating performance for
international transactions than for domestic ones. This is an indication that acquirers are not
properly valuing or seizing synergies in cross-border M&A’s.
In consonance with the previous two papers Chari et al. (2010) also state that normally cross-
border transactions experience a negative post-merger performance. Only if they have
intangible asset advantages that can be exploited abroad, can they increase their firms’
performance. One can therefore presume that an increase in cross-national distance, affects
post-merger performance negatively with large corporations.
Cross-national difference is measured by using the matrix of Berry et al. (2010). A
critic of the Hofstede and the Ghemawat9 approach is Berry et al. (2010), they mention that
previous research has conceptualised cross-national differences mostly in terms of dyadic
cultural distance, because it is measured using a Euclidean10 approach. They use a more
multi-dimensional approach by combining a range of measures. Although up to now there has
not been a theoretical agreement on how to measure cultural and cross border distance
(Teerikangas and Very, 2006). This paper feels that by using their matrix, it is the best
approach to measure the cultural cross-border distance between merging firms.
All previous studies have not taken into consideration the affect of cultural distance and SME
performance. One study done did however mention that smaller acquirers outperform larger
ones, irrespective of the country where the acquirer is based (Alexandridis et al., 2010).
Although this study considers smaller corporations, we consider the same is true for SME’s:
H3: A higher cross-border distance between acquirer and target will have a negative effect
on post merger performance in an acquirer 9 One of the first academics that created a measurement to calculate cultural distance is Hofstede (1994) In his paper “the business of international business culture” it defines culture as the collective programming of the mind with distinguishes the member of one category of people to another. These five factors were given a rating for each country, so that a combined measure of comparison could be created, Ghemawat (2001) also built a framework to calculate distance, to help managers identify and assess the impact of distance of various industries. 10 Euclidean distance: is a metric is the "ordinary" distance between two points that one would measure with a ruler, and is given by the Pythagorean formula.
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3.3 Previous M&A Experience and SME M&A performance
This thesis will also consider the effect on post M&A performance as a result of previous
acquisition experience by an acquiring firm. Learning from acquisitions suggests the transfer
of a firm’s experience from one event to the following, plays a crucial role in determining the
success or failure of the newly formed M&A. A substantial volume of previous studies show
that firms with an overall strategy and experience of M&A are more prosperous than those
that are less experienced in M&A (Barkema & Schijven, 2008).
Lubatkin (1983) stated that firms with considerable experience in former acquisition
experience are more proficient in implementing any necessary structural changes needed after
a merger or acquisition and thus avoid any sort of administrative costs that may have a
negative impact on performance. An example of this could be differences in managerial
styles, fear of layoffs and increased size of the company. Two other studies reveal that
learning from prior engagements in M&A may be critical in future performance of that
particular company any stage of the process of buying or merging with a firm (Lei et al.,
1996; Vermeulen & Barkema, 2001).
Only a few studies discovered that the post merger performance of consecutive M&A
acquirers decline from deal to deal (Ismail, 2006; Aktas et al., 2009). But overall the notion is
in line with other academics in that there is a positive relationship between experience and
performance (Bruton et al. 1994; Vermeulen & Barkema, 2001).
Williams et al. (2008) state that a lot SME’s lack previous relevant M&A experience,
that might help generate efficient created synergies, so therefore because of this lack of
experience, post merger performance is affected negatively. To conclude from the literature,
firms can become more capable at managing specific types of complex organisational
undertakings, such as being involved in M&A’s, this is because they gain more experience in
such type of transactions. Similarly they should be more capable to negotiate and buy the
target at a low premium.
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What this research paper set out to do is to see if SME’s that actually have previous
M&A experience also has a positive post merger performance like large corporations:
H4: Previous M&A Experience of the acquiring SME has a positive outcome on post-merger
performance
3.4 Industry similarity and SME M&A performance
A factor that can affect firm performance after an M&A is industry similarity. An
M&A occurring in a different industry then its acquirer is also called diversification.
In the paper of Mantravadi & Reddy (2008), they do a study on post-merger
performance of acquiring firms in different industries. The result of the study is that there are
slight deviations in operating performance following mergers of public traded companies in
India. So one has to ask the question, as the type of industry does seem to make a difference
in M&A performance, what would it do the post-merger operating performance of acquiring
firms when they diversify into different industries?
A number of research works have brought up significant interests in performance
differences with various forms of diversification. Several delivered findings signifying that
businesses that engaged in M&A with firms of the same industry experienced greater
performance gains (Schmidt and Karen, 1990). One of those studies, such as that of Singh &
Montgomery (1987) for example showed that mergers in a related industry give better
abnormal return than that of mergers in unrelated industries. The reason given, why related
mergers are more successful, is that they are able achieve operating efficiency and market
power more effectively. This is because the opportunity occurs to accomplish economies of
scope and scale, to manage the price and amount of the goods sold, and to form some type of
collusion.
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On the contrary Chatterjee (1986) exposed in their study that M&A deals that happen
in industries that are unrelated are more profitable for both the acquiring and the target.
Unrelated M&A’s can create value by reducing risk via diversification.
In the King et al. (2004) paper, part of their study is on industry related and unrelated
acquisitions. They conclude by saying that neither related/unrelated industries explain the
effect of post-merger performance and “thus, despite decades of research, what impacts the
financial performance of firms engaging in M&A activity remains largely unexplained”(King
et al., 2004).
How industry similarity truly affects post-merger is still unclear, as there are still
contradictory positions amongst academics regarding this topic. Research is still missing
concerning industry similarity and post-performance for SME’s. This research paper takes the
stance off all research named by Schmidt and Karen, 1990 and considers that there is a
positive outcome on post-merger performance when an acquirer merges with a firm in the
same industry. As according to Weitzel and McCarthy (2009) SME’s use M&A for external
growth, this is done more easily in the same industry and less costly for a firm (Lubatkin,
1983; Giuseppe, 1995), the study will determine if this is true. .
H5: A merger & acquisition between parties in the same industry has a positive outcome on
post-merger performance in an SME.
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3.5 Conceptual model
In the previous section, five hypotheses have been established. Figure 3.2 shows the
conceptual model containing the relationship between the dependent and independent
variable. The model refers to the direct relationship between “ Pre- merger Factors that affect
performance” and Post merger performance in SME’s. The individual pre-merger factors that
affect performance have been graphically illustrated in the small boxes. Each small box has
an effect on post-merger performance and is hypothesised.
Figure 3.2: Conceptual model
Post-mergerperformanceinSME's
H1,H2:Thepublictakeoverprocess
H3:culturaldistance
H4:PreviousM&A
experience
H5:Industrysimilarity
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4. Data and Method
In this section the methodological part of the thesis is presented. First the way the data was
obtained will be described. Second the variables used in this research will be presented and
finally, the data analysis that was conducted including regression models will be explained.
4.1 Sample and Data collection
In this research, the compounded average growth rate (CAGR) of the total assets of the SME
between 2009 until 2015 is the dependent variable. Cultural distance, Previous experience in
M&A’s, Industry similarity and Length in the pre-merger phase are the independent variables.
Data was collected from 608 firms within the EU (all 27 member states). The reason the study
was conducted only in the EU is that the definition of an SME is a term established by the
European commission and its criteria differs in other regions. An SME is a firm with a
turnover that does not exceed 50 million Euros, 43 million Euros in total assets and does not
have more than 250 employees (European Commission). The data gathered (608 companies)
are all SME’s, in the EU, that acquired or merged with a firm anywhere else in the world in
the year 2009.
Data was gathered and investigated on all merger and acquisitions that occurred after
the financial crisis i.e. 2009 onwards. M&A data that occurred during the financial crisis
(2007-2008) would be unreliable as M&A activity significantly decreased, congruently
marking the end of the 6th Merger wave. As mentioned in Section 2, there is evidence that in
2009 M&A activity started to recover. The data originates from a database called Bureau van
Dijk, where company data was obtained through Orbis and M&A data from Zephyr, both
subsidiaries of Bureau van Dijk. Orbis is a database that contains extensive financial
information from millions of companies worldwide. Whereas Zephyr is a database that
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3184 SME’s that undergo
an M&A in 2009 in EU (27)
Missing data on important
independent variables
N=2305
Missing financial data from
2009 to 2014
N=271
879 SME’s with data to
calculate TA CAGR
Final sample
608 SME’s
contains information on M&A, IPO, private equity and venture capital deals, announcements
and rumours from firms worldwide.
The data from Zephyr has been merged with Orbis to recover more financial information on
the companies participating in the deal. The data was collected on Bureau van Dijk and stored
to Microsoft excel. To perform the statistical analyses, the Statistical software Package for
Social Sciences (SPSS) version 22 was used. Looking at Figure 4.1 you can see how the final
sample was obtained. According to Orbis there were 3.184 SME’s that went through a merger
and/or acquisition in 2009 that released some type of information of their financial statements
and M&A deal. Four types of independent variables were needed. As often SME’s did not
disclose one or two variables of this important M&A data, this left us with 879 SME’s.
Financial information of the SME’s total assets over five consecutive years was needed to
calculate the performance growth rate compounded annually (2009-2014). 271 SME’s did not
disclose some or all of this essential information. Therefore, this gave us the final sample of
608 SME’s used for our quantitative study.
Figure 4.1: Flow chart of the working sample
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4.2 Measurement of variables
4.2.1 Dependent variable
This study has one dependent variable and it represents the post-merger performance of the
SME. Previously it was decided that to measure post-merger performance that the accounting-
based method should be used. As it was difficult to obtain elaborate financial data from
SME’s, because these type of companies do not need to declare their financial statements, two
type of performance indicators were considered that were obtainable in the database; Revenue
or Total assets. Although revenues are a good indicator of results, they do not show the added
value to the organisation. A growth in total assets would indicate that an organisation adds
value. When testing for normalcy, it was decided to use total assets exclusively, since the data
was a better fit for this specific study, as revenue did not portray consistent results.
When total assets were chosen as a performance indicator, a decision needed to be
made on the most accurate way to measure returns in total assets from the year 2009 to 2014,
two were identified; compounded annual growth rate (CAGR) and average growth rate. The
CAGR 11 represents one of the most accurate ways to calculate and determine returns for
individual assets, investment portfolios and anything that can rise or fall in value over time
(PWC, 2007).
4.2.2 Independent variables
There are four independent variables that need to be considered; Time taken in the public take
over process, Culture & cross-border distance, previous M&A experience and industry
similarity.
Time taken in the public take over process
11 CAGR represents the year-over-year growth rate of an investment over a specified time period. And as the name implies, it uses compounding to determine the return on the investment, which is a more accurate measure when returns are more volatile. Source: investopedia
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Time taken in the public takeover process was measured in the amount of days taken from
deal announcement until deal completion. Dikova et al. (2009) define it as “acquisition
duration”. This value was calculated by looking at the difference between the announcement
date and deal closure of each SME, on the Bureau van Dijk database, Zephyr. In the sample it
became clear that SME’s often skip the public takeover process and close the deal straight
after the private takeover process identified in page 20, paragraph 1.
Culture & cross-border distance
The distance between companies was calculated based on the cultural cross-border distance
matrix from Berry et al. (2010). They use a multi-dimensional approach by combining a range
of measure, including economic, financial, political, administrative, cultural, demographic,
knowledge, global connectedness and geographic distance. These researchers made their
distance available for all managers and scholars. The matrix gives a value representing the
cross-border distance between two countries. The higher the value, the higher the cross-border
distance. A value of zero means that the SME is engaged in a domestic M&A transaction.
Previous M&A Experience
Previous M&A experience was measured using data from Bureau van Dijk. A SME was
considered experienced if it had done more than one previous M&A in its existence. In the
sample it was evident that SME’s had less M&A experience then its large corporations
counterparts. A point scale was used ranging from 1 (previous M&A experience) to 0 (No
previous M&A experience).
Industry similarity
This was simply measured by differentiating between SME’s that are engaging in a deal
together which are in a similar industry or each from a different industry. The classification of
industries follows the industry classification code established by Zephus. Zephus is a
subsidiary of the database this research paper uses, Bureau van Dijk, whose main task is to
collect information on M&A deals. Information is collected from different sources and
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complemented with news, market research, and information from official bodies. A point
scale was used ranging from 1 (different industry) to 0 (similar industry).
4.3 Method and model specification
The hypotheses in this study are relational hypotheses; therefore a correlation analysis
was conducted to establish whether there is a relationship between the dependent and
independent variables, as seen in Table 5.1. The data is normally distributed and therefore the
Pearson correlation value was used. This data is two-tailed, since this study isn’t related to
one specific direction (see Figure II).
The planned hypotheses were tested through a regression analysis; a linear regression
technique determines whether the independent variables explain a significant amount of the
variation in the dependent variable. The most apparent straight line through sets of variables
is created by the regression analysis; this association can be formulated with the following