Measuring Value Creation in M&As - A comparison between related and unrelated firms

University essay from Göteborgs universitet/Företagsekonomiska institutionen

Author: Viktor Brage; Gustaf Eckerström; [2010-05-21]

Keywords: ;

Abstract: The global mergers & acquisitions (M&A) market is immense. In 2007, M&A volumereached an unprecedented value of $4,500 billion globally. One major concern for M&Aactivity, however, is whether the transaction creates value or not. Previous studies showthat approximately 60-80 percent of all M&As fail to create value. As a result, much efforthas been put into investigating sources of value creation in M&A contexts. Many studiessingle out firm relatedness as an important factor, i.e. the extent to which merging firmsshare similarities. While plentiful research has been conducted on the subject of firmrelatedness in the context of value creation, it has failed to produce consistent results.This study aims to extend previous research on firm relatedness by introducing the role ofintellectual capital in value creation processes pertaining to M&A activity. Morespecifically, the study theorizes that through the ability to pool two sets of intellectualcapital with divergent configurations, unrelated M&As should be expected to creategreater value than related ones. This is tested by calculating pre- and post-consummationvalues of intellectual capital for a sample of 15 related and 15 unrelated M&As.Cumulative abnormal returns are also calculated as a measure of each deals’ valuecreation potential according to market expectations.The findings of this study suggest that the unrelated M&As consistently seem tooutperform related ones in terms of gains to the value of intellectual capital and in termsof market expectations. However, the statistical significance of the findings is insufficientfor valid conclusions to be drawn. We argue that further research should be made in orderto investigate if statistical significance can be achieved.

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