P OST - MERGER P ERFORMANCE AND R ELATIVE S IZE OF C OMBINING F IRMS IN THE S HORT - RUN 57

Being discussed in Chapter 3, there are two issues for post-merger performance to be investigated in the short-term of first quarter after mergers. The first issue is the argument of relatively negative performance in the short-term, seeing if the probable negative performance caused by the anarchical condition in their first quarters after mergers exists in those newly combined firms. Through the event study analysis for the entire samples of this dissertation in section 5.1, it showed significantly negative merger impact on performance as the measures of stock returns, ROA, and ROE.

Therefore, this argument was successfully proved.

The second issue for short-run post-merger performance is to investigate how different relative sizes of combining firms influence the short-run performance. In

is relatively large. The investigation for this issue was done by two analysis methods of event studies and regression analysis.

After conducting event studies for four quartile groups, the results show that only percentage changes in ROE is corresponded to the argument; though not significantly.

The percentage change in ROE got more negative with increasing the absolute size of the acquiring companies. In other words, the larger the size of the acquiring companies, the more the shareholders of the newly merged company would lose in the first quarter after mergers. As for the relative size viewpoints, the percentage change in ROE gets more negative when the size difference between combining companies get larger. This means the larger the size gap between the two companies, the shareholders lose more in the first quarter after mergers.

In the multivariate regression analysis, there were two significant results found, where percentage change for stock returns in the first quarter after mergers are positively related to the absolute size of the acquiring firms and the relative sizes of the combining firms. In other words, the larger the size of an acquiring company, and, the larger the size gap between the combining firms, the more abnormal share returns the shareholders of this newly combined firm would earn. The results are different from the original argument, but it might be explained by these two viewpoints: First, when the acquiring companies are larger, investors would expect more experiences and abilities to deal with the merger events because larger companies are usually more historical and with more various resources. Second, investors would expect more probable economies of scale, economies of scope, or growth opportunities for targets with larger sizes, because if a target is too small, the aims and goals of the merger might be limitedly achieved. It might be due to the more expectation for the larger

target, so that the stock returns increase comparing to the pre-merger stages.

In addition to the regression analysis for percentage change for stock returns, the same investigation was done for ROA and ROE as well. There is no significant association found between relative size and percentage change for operating performance. The results can be explained that in the short-term, the stock price, as the market assessment, is the better indicator for measuring post-merger performance. However, it is still worth mentioned that the beta of relative sizes in the regression for ROE was found negative, which was roughly corresponded to the arguments in chapter 3. It then can be inferred that though investors have higher expectation for larger targets, M&A deals with smaller targets actually had better return on equities in the short-term after mergers.

6.2 Post-merger Performance in the Long-run and Relative Size of Combining Firms

Similar to the discussion in the short-term post-merger performance, the investigation in the long-term up to five years broke into two parts. The first part was to investigate the overall post-merger performance in the long-term; the second part was to divide the whole sample deals into four even quartile groups and see whether various level of relative size of combining firms is a function to post-merger performance in the long-term.

After conducting event study analysis, the results of findings are to be discussed here.

The average abnormal returns of shares for the whole samples showed significantly negative in all post-event periods after mergers. The results are corresponded to most previous studies as discussed in chapter 2. The managerial meaning of the results is

that after mergers, the shareholders of the newly combined companies had worse share returns comparing to the pre-merger periods. For the average excess operating performance of AEROA and AEROE, the whole sample studies showed significantly negative for the first three years after mergers. From the fourth year after mergers, excess operating performance for ROA and ROE showed no significantly different from zero. Moreover, AEROA and AEROE become less negative as years went by.

The results for operating performance showed that for the early years after mergers, the operating performance of the newly combined companies were worse than which of the pre-merger stages. However, the overall operating performance was getting better in the long-run. Therefore, it can be proved that after a period of integration, the operating performance of the combined firms would improve.

After analyzing the whole sample deals, the event study analysis was then extending to the investigation of four even quartile groups. The abnormal returns of shares were significantly negative for most groups except the first quartile group in the third to the fifth years after mergers. The managerial meaning of this result could be explained by that the share returns for the shareholders of the merged firms with relatively smaller targets were not much different from the pre-merger periods after the third year since mergers, while shareholders for the rest groups experienced significantly less share returns after mergers. In addition, because most cumulated abnormal share returns for the whole samples are negative, it can be inferred that shareholders of most merged firms undergo continuous loss up to five years after mergers.

For the post-merger operating performance of AEROA and AEROE, it has been observed from the results of the previous chapter that for the first quartile group, both AEROA and AEROE were significantly negative throughout the post-event windows;

for the second and third quartile groups, the average excess operating performance did not always significantly differ from zero; for the fourth quartile group, the most excess operating performance was not significantly different from zero, and the most AEROA and AEROE for this group were positive after the second year after mergers.

The explained results discussed above can be roughly concluded that as the relative size becomes bigger, i.e. the bigger the size of the target firms, the post-merger performance of the combined firms in the long-term turned out to be better. As discussed in the short-term performance, this phenomenon might be due to the reason of better resources of larger targets, where a larger firm might have more resources than a smaller firm, so that the merger aims of economies of scale and economies of scope can be more realized with more possibility. Therefore, when the merger benefits are realized, the operating performance would become relatively better.

6.3 Summary and Conclusion

This chapter connected the arguments and the analysis results in chapter 3 and chapter 5 respectively.

The short-term post-merger performance under both market assessments and operating performance assessments for the whole samples were significantly negative, and therefore, the arguments of negative performance after mergers were proved. In the first post-merger quarter, the percentage change for ROE turned worse when the sizes of the target firms become larger related to the acquiring firms, meaning that as the target sizes become bigger, the anarchical condition become worse. The regression results show that percentage change in stock returns in the short-run was significantly positively associated to the target sizes comparing to acquirers in M&A deals. In

acquiring companies. The results can be explained by the higher expectation of realizing M&A goals in the future from the investors when larger firms are combined.

However, at the same time, though investors expect higher for larger targets, the post-merger performance for the first quarter were actually worse than pre-merger periods.

The long-term post-merger performance under both market assessments and operating performance assessments for the whole samples were significantly negative. The results were the same as most previous studies discussed in chapter 2. Besides, the performance turned to be better as post-merger time went by. Connecting the issue of long-term post-merger performance to the relative size of combining firms, the results showed that as the size of the target companies comparing to the acquirers become larger, the shareholders earned less comparing to which before mergers, but the operating performance become relatively better due to the higher possibility of realizing potential M&A benefits.

7. C ONCLUSIONS AND R ECOMMANDATION

Based on the results for the analyses and discussion above, this chapter draws conclusions and provides answers to the central question. Finally, at the end of this dissertation, recommendations for further investigation connected to this study are offered.