Chapter 1: Introduction

1.1 Purpose of the Study

Mergers and Acquisitions occur when two or more organizations join together all or part
of their operations. This corporate strategy is justified only if it is expected to make the merged
firms profits greater than the sum of the original firms profits, a result that is commonly termed
as synergy. !t is generally argued to arise from economies of scale, cost reductions, enhanced
efficiencies, effecti"e use of free cash flows and complimentary resources.
Mergers and acquisitions ha"e taken place at a staggering pace #etween $%%& and '(((.
Many experts and academics ha"e classified this as the era of mega)deals. *rom a modest +&''
#illion of deals in $%%', the worldwide "olume of com#inations has marched steadily upward to
+&.' trillion in '(((.
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!t is important to determine if any "alue is #eing deri"ed from these
transactions or not as the stakes are high in each transaction.
,mpirical e"idence on the #enefits of mergers is mixed. -ifferences in methodologies,
samples and markets ha"e yielded inconsistent results, especially concerning the returns of
acquiring companies. The majority of research has concentrated on measuring performance #y
mo"ements in stock prices. !n this study, we re)examine the issue using post)merger accounting
data to test directly for changes in operating performance. The o#jecti"e of the study is to
in"estigate the relationship #etween the financial performance and "arious financial and non)
financial measures which proxy for the synergies resulting in changes in firm performance.
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1.2 Outline of the Study
!n .hapter ' we pro"ide a historical #ackground on mergers and acquisitions and reflect
on the synergy moti"e of mergers. The accounting data we use to test for synergies is su#ject to
the way the merger was financed and accounted for. /e discuss this in detail in this chapter.
.hapter & pro"ides an o"er"iew of the existing literature on mergers and acquisitions and
deri"es the methodology for testing synergies #ased on pre"ious methodologies. /e determine
the appropriate #enchmark for performance comparison and define the proxy "aria#les to #e
used to capture synergies.
/e conduct empirical to test our hypothesis in .hapter 0. /e #egin with a discussion of
the sample from which the e"idence is drawn and the data statistics. *irst, we identify the #est
proxy "aria#les for the estimation of synergies from mergers #ased on theoretical e"idence. Then
we test the impro"ements in firm performance, as measured #y our cash flow return measure
with the selected proxies on the entire sample. /e di"ide the sample into related "ersus
conglomerate mergers to test for any differences in the way the synergies are realized. The
sample further di"ided according to success or failure of the transaction judged #y the cash flow
return.
!n .hapter 1 we perform case studies of four mergers that are classified as successful and
unsuccessful #y our model #ased on industry)adjusted cash flow from operations. The regression
results outlined in .hapter 0 fail to pro"ide tangi#le e"idence on the sources of synergies from
mergers. /e therefore resort to case study style reasearch in order to understand the unique
characteristic of each merger. !n conducting a case study, we summarize the reports from the
financial press e"aluating the merger ex ante and ex post compare the analysis with the findings
from our model.
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.hapter 2 summarizes the empirical findings and discusses the limitations of the study.
/e also highlight the contri#utions of this study to the existing literature and suggest further
research.
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Chapter 2: Merger Motives and Determinants
/e #egin this chapter with an o"er"iew of the different types of mergers and the moti"es #ehind
such transaction. Then we expand on the synergy moti"e for mergers and analyze the draw#acks
with using accounting measure to test the realization of synergies.
2.1.Mergers and c!uisitions " Definition
Mergers and Acquisitions 3M4A5 occur when two or more organizations join together all
or part of their operations. The differences #etween mergers and acquisitions relate mainly to the
relati"e size of the indi"idual companies in the #usiness com#ination, ownership of the com#ined
#usiness, and management control of the com#ined #usiness.
!n general, a merger can refer to any takeo"er of one company #y another, when the
#usinesses of each company are #rought together as one. 6pecifically, it is pooling of resources
of two companies 3roughly equal size5 into a single #usiness. The stockholders or owners of #oth
pre)merger companies ha"e a share in the ownership of the merged #usiness and the top
management of #oth companies continues to hold senior management positions after the merger.
.ontrol is the key distinction #etween a merger and an acquisition. An acquisition is the
takeo"er of the ownership and management control of one company #y another. This occurs
when one company acquires from another company either a controlling interest in the companys
stock or a #usiness operation and its assets.
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2.2.#ypes of Mergers
Mergers are often categorized as horizontal, "ertical or conglomerate mergers. A
horizontal merger occurs when companies expand into markets for products that it has not made
#efore, #ut which are similar to its existing product range. The company expects to use its
existing resources, including distri#ution channels, marketing skills or management skills etc to
impro"e the performance of acquired companies. *or example, in $%%0 two defense firms,
7orthrop and 8rumman, com#ined in a +'.$9 #illion merger :.oyle '(((;. !f a horizontal
merger causes the com#ined firm to experience an increase in market power that will ha"e
anticompetiti"e effects, the merger may #e opposed on antitrust grounds. !n recent years,
howe"er, the go"ernment has #een somewhat li#eral in allowing many horizontal mergers to go
unopposed. !f a company pursues a strategy for growth through horizontal di"ersification, it is
not necessarily seeking a dominant market position. !t might simply keep looking out for
potential targets in a focused sector of an industry.
Vertical mergers are com#inations of companies that ha"e a #uyer)seller relationship. !t is
usually moti"ated #y a wish to< 3i5 secure a source of supply for key materials or ser"ices= 3ii5
secure a distri#ution outlet or a major customer for the company>s products= and?or 3iii5 impro"e
profita#ility #y expanding into the high)margin acti"ities of suppliers or customers. !n early
$%%@, .ompaq .omputer .orporation acquired -igital ,quipment .orporation 3-,.5 for +%
#illion. -,.>s high)end Alpha)chip technology and ser"ers fitted neatly into .ompaq>s existing
products, while its support ser"ices di"ision was "iewed as another "alua#le addition. *ollowing
the acquisition, .ompaq has #ecome a complete computer ser"ices company :.oyle, '(((;. Also,
in $%%&, Merck, the world>s largest drug company acquired Medco .ontainment 6er"ices, !nc.,
the largest marketer of discount prescription medicines, for +2 #illion. The transaction ena#led
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Merck to not only #e the largest pharmaceutical company #ut also the largest integrated producer
and distri#utor of pharmaceuticals.
A conglomerate merger occurs when the acquiring company purchases firms in largely
unrelated industries. Ane example would #e B.6. 6teels acquisition of Marathon Ail to form
B6C. .oyle :'(((; points out that at one time it was generally #elie"ed that conglomerates had a
low in"estment risk for shareholders, compared with companies that concentrated their acti"ities
in a single industry. !n a conglomerate, risk is lower #ecause successful performers #alance #adly
performing su#sidiaries in the group, and the annual profits of the conglomerate as a whole
should #e more predicta#le. As markets grow, companies often can achie"e the #est returns for
shareholders #y concentrating their resources and skills on core #usiness acti"ities.
.onsequently, many companies ha"e sold off non)core #usinesses, and the trend has #een away
from conglomerate di"ersification and towards product?market specialization.
2.$.%istory of Mergers
Mergers and Acquisitions acti"ity in the Bnited 6tates came in fi"e identifia#le wa"es in
the last century. These periods were characterized #y cyclic acti"ities, that is, high le"el of
mergers followed #y periods of relati"ely fewer mergers. The fi"e wa"es occurred #etween $@%9
and $%(0, $%$2 and $%'%, $%21 and $%2%, $%@$ and $%@% and $%%' till present time.
:-eDamphilis, '(($;
2.$.1.#he &irst 'ave
The *irst /a"e, $@%9)$%(0, was spurred #y a dri"e for efficiency, lax enforcement of the
6herman Anti)Trust Act, westward migration and technological change. Mergers during this
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period were largely horizontal and resulted in increased concentration in primary metals,
transportation and mining. *raudulent financing and the stock market crash of $%(0 ended this
#oom. 6ome of the giants that were formed during this era included 6tandard Ail, ,astman
Eodak, American To#acco and 8eneral ,lectric. :-eDamphilis, '(($;
2.$.2.#he Second 'ave
The 6econd /a"e, $%$2)$%'%, was a result of the entry of the Bnited 6tates into /orld
/ar ! and the postwar economic #oom. Mergers also tended to #e horizontal and further
increased industry concentration. This era came to a close as a consequence of the stock market
crash of $%'% and the passage of the .layton Act, which further defined what constituted
monopolistic practices. :-eDamphilis, '(($;
2.$.$.#he #hird 'ave
The Third /a"e, $%21)$%2%, was initiated #y the desire to di"ersify and was
characterized #y the emergence of financial engineering and conglomeration. A rising stock
market and the longest period of uninterrupted growth in the nation>s history up to that time
resulted in record price)to)earnings 3D?,5 ratios. .ompanies gi"en high D?, ratios #y in"estors
learned how to grow earnings per share 3,D65 through acquisition, rather than through
rein"estment. 6tock)for)stock transactions #ecame increasingly commonplace. .ompanies such
as !TT, Fitton !ndustries, and FTG acquired firms in "ery di"erse industries that had a#solutely
nothing to do with one another. Hy early $%9(s, conglomerates were largely out of fa"or with
in"estors. :-eDamphilis, '(($;
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2.$.(.#he &ourth 'ave
The *ourth /a"e, $%@$)$%@%, was characterized #y a #reak)up of many of the major
conglomerates and an increase of financial #uyers using the hostile takeo"er and the FHA as
their primary acquisition strategies. Management #uyouts and takeo"ers of B.6. companies #y
foreign acquirers #ecame more common. .onglomerates #egan to di"est unrelated acquisitions
made in the $%2(s and early $%9(s. *or the first time, takeo"ers of B.6. companies #y foreign
firms in the $%@(s exceeded in num#er and dollars the acquisitions #y B.6. firms of companies in
,urope, .anada, and the Dacific Iim, excluding Japan. The moti"ation for foreign purchases of
B.6. companies resulted from the size of the market, limited restrictions on takeo"ers, the
sophistication of B.6. firm>s technology and the weaknesses of the dollar against major foreign
currencies. The $%@(s were also characterized #y hostile takeo"ers financed #y FHAs. The
gradual decline of the FHA fortunes towards the end of the decade along with a slowing
economy reduced the le"el of merger acti"ity. :8aughan, $%%2;
2.$.).#he &ifth 'ave
/hile M4A acti"ity was slow during the $%%( recession, the num#er of transactions and
the dollar "olume re#ounded sharply after $%%'. The *ifth /a"e, $%%' until '(($, was a result of
the com#ination of the !nformation Technology re"olution, continued deregulation, reductions in
trade #arrier and the glo#al trend towards pri"atization, which together powered the longest
economic expansion and stock market #oom in B.6. history. Hy $%%%, the announced dollar
"olume of glo#al M4A acti"ity set a new record of +&.0& trillion. This figure was &2K a#o"e
$%%@>s dollar "alue of +'.1' trillion. The total num#er of announced transactions reached &$,1'@
in $%%%. According to Thompson *inancial 6ecurities -ata .orporation, in the Bnited 6tates,
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$%%%>s announced dollar "olume rose #y a more modest 9.0K o"er its $%%@ le"el of +$.2& trillion
to +$.91 trillion, its se"enth consecuti"e annual record. This increase in the dollar "olume of
acti"ity came despite a decline in the num#er of B.6. transactions from $%%@>s record le"el of
$',&(( to $(,@(( in $%%%. The #uoyant market for corporate transactions during the late $%%(s
was a result of high growth expectations and lofty stock market prices. The recent decline in
stock prices of many pu#licly traded companies, along with a tightening of "enture capital
in"estments, ha"e put the #rakes on the pace of mergers and acquisitions.
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2.(. Motives and Determinants
Ta#le '.$ lists some of the more prominent theories a#out the moti"es and determinants
of mergers. The focus of this research is on the synergy moti"e of mergers.
#a*le: 2.1 Common #heories on Motives and Determinants of M+ 36ource< -eDamphilis, pg.$@5
#heory:
6ynergy
-i"ersification
Market power
Lu#ris 3managerial pride5
Agency pro#lems and mismanagement
Managerialism
Tax considerations
Motivation:
!mpro"e operating efficiency through economies
of scale or scope. Fower cost of capital #y
smoothing cash flow.
Dosition the firm in higher growth markets
!ncrease market share
Acquirers #elie"e that their "aluations of targets
are more accurate than the market>s.
Ieplace managers who are not acting in the #est
interests of the owners
!ncrease the size of a company to increase the
power and pay of managers
A#tain unused net operating losses and tax
credits, asset write)ups
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2.(.1 Definition of Synergy
6irower 3$%%95 defines synergy as Mincreases in competiti"eness and resulting cash flows
#eyond what the two companies are expected to accomplish independently.N Managers who pay
acquisition premiums commit themsel"es to deli"ering more than the market already expects
from current strategic plans. As the markets ha"e already priced what is expected from the stand)
alone firms, the net present "alue 37DG5 of the transaction can #e modeled as follows<
7DG O 6ynergy P Dremium
.ompanies that do not take into consideration this fundamental equation risk falling into what
6irower calls Mthe synergy trapN. The markets attempt to assess the 7DG of the merging decision.
The more negati"e the assessment is, the worse the damage to the #alance sheet of the companies
and the share price. 6irower points out that the financial economics literature categorizes the
acquisition premium as a representation of the expected synergy in a corporate com#ination.
According to this explanation, the acquirers pay a premium #ecause the expected "alue of the
com#ined firm is greater than the expected "alue of the sum of the independent parts. The
anticipated existence of synergistic #enefits allows firms to incur the expenses of the acquisition
process and still #e a#le to gi"e target shareholders a premium for their shares. There are three
#asic types of synergy )) operating, financial and managerial.
2.(.2. Operating Synergies
Aperating synergy refers to the efficiency gains or operating economies that are deri"ed
in horizontal or "ertical mergers. !t consists of #oth economies of scale and economies of scope.
Economies of scale refer to the spreading of fixed costs o"er increasing production le"els.
6e"eral examples of mergers and acquisitions moti"ated #y the pursuit of scale economies ha"e
$(
occurred in the cruise industry, which has undergone a series of consolidating mergers and
acquisitions. The $%@% acquisition of 6itmar .ruises #y Drincess .ruises ena#led the com#ined
cruise lines to offer an expanded product line in the form of more ships, #eds, and itineraries
while lowering per)#ed costs :8aughan, $%%2;. Economies of scope, on the other hand, is the
a#ility of a firm to utilize one set of inputs to pro"ide a #roader range of products and ser"ices. A
good example of scope economies arises in the #anking industry. 6cope economies, rather than
economies of scale, are often seen as the main #enefits #anks deri"e #y merging. /hen financial
institutions merge, they can share inputs to offer a #roader range of ser"ices such as a trust
department or economic analysis unit. 6maller #anks might not #e a#le to afford the costs of
these departments. !nputs such as a computer system can #e shared to process a wide "ariety of
loans and deposit accounts. *or example, .itigroup uses the same computer center to process
loan applications, deposits, trust ser"ices and mutual fund accounts for its #anks customers.
2.(.$. &inancial Synergies
*inancial synergy, on the other hand, refers to the impact of mergers and acquisitions on
the cost of capital of the acquiring firm or the newly formed firm resulting from the merger or
acquisition. Theoretically, the cost of capital could #e reduced if the merged firms ha"e
uncorrelated cash flows, realize financial economies of scale, or result in a #etter matching of
in"estment opportunities with internally generated funds. 6udarsanam 3$%%25 identifies three
possi#le sources of financial synergy< the tax ad"antage of unused de#t capacity in either the
#idder or target= the complementary nature of the growth opportunities and financial resources of
the merging companies and the coinsurance of de#t of the two companies. /here one of the
merging companies has unused de#t capacity while the other already operates at or near its
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optimal gearing le"el, the tax ad"antage of de#t means that #oth companies will gain from
exhausting the unused de#t capacity. Thus, this argument predicts that the larger the difference in
de#t le"els #etween the merging companies, the greater the "alue creation from their merger.
2.(.(. Managerial Synergies
6udarsanam 3$%%25 also identify managerial synergy as another non)operational sources
of synergy that can create "alue in a merger. This could arise if the #idder has a competent
managerial team and takes o"er a target with less competent managers. 6uch a takeo"er is
disciplinary, with the weak target management team #eing su#ject to the discipline of the market
for corporate control.
2.). Measuring the Impact of Synergy
/e can test the impact of synergy #y e"aluating whether merged firms impro"e their
performance, in terms of profita#ility and growth relati"e to their competitors, after the
transaction. Accounting data from #efore and after the transaction can #e used to test whether or
not the synergies claimed in a deal, in terms of cost sa"ings, increased earnings and higher
margins, ha"e #een realized. Measuring synergy using accounting data is likely to #e affected #y
the accounting method used in the merger as well as the method of financing the transaction.
2.).1. Difference *et,een Purchase and Pooling ccounting
,"aluating the merit of a merger or acquisition #ased on its impact on reported earnings
must #e carried out after adjusting for the accounting method used in the merger. -amodharan
3'(($5 mentions that the purchase method of accounting requires that assets and lia#ilities of
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target firms #e restated at their current market "alues. 7o such re"aluation is permitted under the
pooling method. *urther, under the purchase method the acquirer records any difference #etween
the acquisition price and market "alue of identifia#le assets and lia#ilities of the target company
as goodwill and amortizes it. 7o goodwill is recorded under the pooling)of)interests method.
*inally, for the first year of the merger, the purchase method consolidates the results of the target
with those of the acquirer from the date the merger took place. The pooling method consolidates
results for the two firms from the #eginning of the year regardless of when the merger took
place.
The same transaction typically results in lower post)merger earnings under purchase
accounting than under pooling. The purchase method increases depreciation, cost of goods sold,
and goodwill expenses su#sequent to the merger. !n addition, in the year of the merger, earnings
are usually lower under purchase accounting #ecause it consolidates the targets earnings with
the acquirer for a shorter period of time than pooling. The lower earnings reported under the
purchase method of accounting for the mergers are not due to differences in economic
performance. *urthermore, post)merger #ook assets under the purchase method will #e larger
than those under pooling #ecause of the asset write)up under the purchase method.
2.).2. -ffects of Method of &inancing Mergers
Dost)acquisition accounting earnings are also influenced #y the method of financing the
merger. Accounting income is computed after deducting interest expenses, #ut #efore allowing
for any cost of equity. Thus, if an acquisition is financed #y de#t or cash, its post)merger profits
will #e lower than if the same merger is financed #y stock. 6ince the differences in earnings
reflect the financing choice and not differences in economic performance, it is misleading to
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compare reported accounting earnings, which are computed after interest income and expense,
for firms that use different methods of merger financing.
This study will test the realization of the operating and financial synergies expected from
a merger using "arious financial and non)financial measures which proxy for possi#le sources of
change in firm performance.
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Chapter $: nalytical &rame,or. for #esting Synergy /eali0ation
!n this chapter, we esta#lish the methodology for testing the impro"ement in performance
of merged entities from the realization of synergies. /e re"iew the existing literature on
measuring post)merger performance #ased on accounting data. Then we deri"e our methodology
for measuring the impact of synergies on merger performance.
$.1 /evie, of Prior /esearch
The literature on mergers and acquisitions has followed one of two approaches to
estimate and e"aluate merger related changes in performance. As Dilloff and 6antomero 3$%%25
point out, the first approach compares the pre)merger and post)merger performance of the
merged entities using accounting data to determine whether the transaction resulted in changes in
reported costs, re"enue or profit figures. The second approach e"aluates the stock market
reaction to merger announcements. These studies examine the a#normal returns of acquirers and
targets separately, #ut se"eral papers analyze the total change in shareholder wealth. Dilloff and
6antomero state that in such cases the "alue)weighted sum of acquirer and target a#normal
returns is the appropriate measure of o"erall gains resulting from merger and acquisition acti"ity,
as it reflects the "alue expected to #e created from the transaction. The authors also mention a
third approach that measures the correlation #etween changes in accounting data and a#normal
returns. Iecently, some studies ha"e also examined mergers on a case)#y)case #asis. This
approach is a result of the need to examine each merger to estimate the gains or losses associated
with different parts of the merger process, in order to understand the gain or loss from the entire
transaction.
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.alomiris and Earceski 3$%%@5 make use of the aforementioned case study approach. To
e"aluate the cases the authors ask whether the acquirers claims of anticipated efficiency gains
from the mergers were plausi#le ex ante and whether ex post results are consistent with those
claims. The sample examined contains an unrepresentati"e portion of midwestern #anks and the
analysis is #ased on a"aila#le pu#lic data. !n e"aluating whether acquirers claims were plausi#le
ex ante, the study looks at the performance of acquirers at the time of the acquisition
announcement. !n each case, the sample #anks are compared with constructed #enchmarks that
pro"ide the most rele"ant comparisons. The e"aluation is conducted #ased on financial ratios
such as asset growth, loans to assets, net interest margin, non)interest income to assets, efficiency
ratio, return on equity and earnings per share. The nine case studies conducted support the "iew
that #ank mergers in the $%%(s ha"e created "alue. *rom a methodological standpoint, the study
concludes that the stock price reactions to consolidation announcements do not offer a relia#le
guide to expected or actual producti"ity gains from consolidation.
6hare price studies ha"e come under further criticism from other authors. Hrailsford and
Enights 3$%%@5 point out that reliance on share prices for the purpose of performance
measurement relies exclusi"ely on the assumption of efficient markets, which has #een su#ject to
much scrutiny. The focus on share "aluation effects implicitly assumes that the market is a#le to
forecast changes in market share. Moreo"er, se"eral effects associated with a takeo"er may not
#e apparent immediately to the market and therefore are not realized in the share price.
Lealy, Dalepu and Iu#ack 3$%%'5, moti"ated #y the ina#ility of stock price performance
studies to determine whether takeo"ers create real economic gains and identify the sources of
such gains, use post)merger accounting data to directly test for changes in operating performance
that result from mergers. The tests use accounting data collected from company annual reports,
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merger prospectuses, proxy statements and analysts reports for 1( large mergers #etween B.6.
pu#lic industrial firms, which were completed in the period $%9% to $%@&. .ash flow measures of
economic performance are used to mitigate the impact of the financing of the acquisition and the
method of accounting for the transaction. Lealy et al. compare the performance of the post)
merged firm to the sum of the #idder plus the target indi"idual pre)merger performance, after
adjusting for the industry wide effect. They also examine the relation #etween the cash flow
measures of post merger performance and stock market measures used in earlier studies.
Hrailsford and Enights 3$%%@5 extend the study conducted #y Lealy et al. to analyze the
performance of #idders in the Australian market following corporate acquisitions. The study
seeks to examine the association #etween real changes in economic performance following a
takeo"er and #oth financial and non)financial measures which proxy for reasons for changes in
performance. 6udarsanam, Loll and 6alami 3$%%25 also use proxies for "arious synergy and
ownership factors to examine the impact of synergy and agency related explanatory "aria#les on
shareholder wealth. The methodology from Lealy et al. is also adapted #y Tsung)Ming and
Loshino 3'(((5 to in"estigate the impact of mergers and acquisitions on #oth the acquiring
firms stock prices and corporate performance #y using e"idence from Taiwanese corporations.
Eruse 3'(($5 on the other hand uses the pretax operating cash flow returns on market "alue of
assets, adapted from Lealy et al. and the pretax operating cash flow di"ided #y sales, adapted
from .lark and Afek 3$%%05, to examine post)merger corporate performance in Japan.
$.2 Performance Measurement
Hased on the study conducted #y Lealy et al. 3$%%'5, we use annual cash flow from
operations as a performance measure. *ollowing their methodology, we collect cash flow and
$9
accounting data for the sample firms for a period #efore and after the merger. *inancial data for
the year of the merger are omitted from the sample to control for the accounting differences
#etween a purchase and pooling method of acquisition and any one)time costs incurred during
the merger.
To measure premerger performance, we com#ine the cash flow and accounting data for
the target and acquirer to o#tain pro forma performance for the merged firms. A comparison with
the postmerger "alue with this premerger #enchmark allows us to measure the impact of the
merger on the performance of the com#ined firm. Aur #enchmark for e"aluating postmerger
performance is industry)adjusted to normalize the data for economy wide or industry factors.
These measures are calculated #y su#tracting the industry a"erage data from the sample firm
data.
The use of operating cash flow as a performance measure ena#les merger assessment
without diluting the results with the impact of the accounting method 3pooling "ersus purchase5
and the method of financing 3stock "ersus cash5 used. As we mention in .hapter ', with the
purchase method of accounting for the merger, depreciation, cost of goods sold and goodwill
expenses after the merger are higher than with pooling method. Therefore, postmerger earnings
would #e lower with the purchase method, ceteris pari#us. *urthermore, accounting income is
computed after deducting interest expenses #ut #efore allowing any cost of equity. Thus, all else
#eing equal, post)acquisition profits would #e lower for cash) or de#t)financed acquisitions than
for stock)financed acquisitions. The cash flow measure we use minimizes #oth these pro#lems.
$@
$.$ Performance 1enchmar.
/e o#tain premerger performance #enchmark for years P$ to P& #efore the merger #y
aggregating the operating cash flow data for the target and acquiring firms in each of the three
premerger years. 6imilarly, the operating cash flows of the merged firm are computed for years $
to & after the merger and are deflated #y total assets of the acquirer to yield a normalized
measure of performance. .omparing the post merger performance to the pre)merger #enchmark
yields the change in performance. This cash flow measure, commonly known as ,H!T-A, is
defined as sales, minus cost of goods sold, and selling and administrati"e expenses, plus
depreciation and goodwill expenses. As mentioned #efore, #y excluding the effect of
depreciation, goodwill, interest expense?income and taxes, this measure is unaffected #y the
method of accounting for the merger as well as the method of financing the merger. /e di"ide
,H!T-A #y #ook "alue of total assets, to pro"ide a return metric that is compara#le across firms
as well as time. Lealy et al. 3$%%'5 uses market "alue of assets, which has noise and is likely to
ad"ersely affect the results. 6ince most of the mergers took place during a #ull market when the
stock prices were high, using market "alue of assets could ha"e a significant impact. Hrailsford
and Enights 3$%%@5 also uses total assets to normalize cash flows.
/e analyze the premerger and postmerger performance #y making the e"ent year as year
( for each transaction. The year prior to merger is denoted #y P$, )' and so on, starting with one
year prior to the merger and going #ackward. *or example, for the firms that merged in $%%&, the
data for $%%' are for year P$ and those for $%%$ are for year P' and so on.
Hased on .lark and Afek 3$%%05, we measure the effect of a merger on cash flow using
the ratio of ,H!T-A to re"enues. Bnlike Lealy, re"enues of the firms in"ol"ed standardize this
measure of cash flow. As mentioned #efore, using market "alue of assets has the ad"antage of
$%
gi"ing a return measure #ut is more sensiti"e to changes in market expectations of firm
performance. *or example, if a firms cash flow declines #y $( percent and the market #elie"es
that the decline is permanent and reduces market "alue #y $( percent, the ratio of cash flow to
market "alue of assets will not change. Hefore the merger, the com#ined cash flow ratio is
calculated as the sum of the #idder and target ,H!T-A di"ided #y the sum of target and #idder
re"enues. After the merger, we use the #idders cash flow ratio.
$.( Measuring Synergy
The o#jecti"e of this study is to examine the association #etween real changes in
economic performance following a merger and #oth financial and non)financial measures which
proxy for reasons for changes in performance. !n other words, our goal is to analyze whether or
not the synergies ad"ertised for mergers and acquisitions ha"e actually #een realized. /e use the
cash flow measure descri#ed pre"iously to capture the impro"ement in performance, if any, after
the transaction. 7ext we construct a series of explanatory "aria#les, following Hrailsfords
3$%%@5 methodology, that are designed to capture the consequent reasons for changes in firm
performance.
*irst, we examine market share 3MET65. Merger)related gains may stem from increased
market power. -eals among firms in the same industry reduce the num#er of firms in markets in
which #oth organizations compete. The market share of the sur"i"ing organization in these
markets is therefore raised. These changes make the affected markets more "ulnera#le to reduced
competition. The increased market power of the sur"i"ing organization may ena#le it to earn
higher profits. MET6 is designed to capture this effect and is constructed as the ratio of a firms
re"enue to the total re"enue of its industry. The "aria#le pro"ides some indication of changes in
'(
industry competition and the merged firms potential for price setting. *or the purposes of
industry classification, we use the four)digit primary 6!. code. !n the years prior to the merger,
MET6 is the ratio of the aggregate re"enues of the #idder and target and the sum of the total
re"enues of their respecti"e industries. *or years after the merger, MET6 is the ratio of the
re"enue of the #idder to the total re"enue of the #idders industry. This "aria#le is more rele"ant
for similar industry mergers. A conglomerate merger does not per se increase the market shares
of the merged entity.
6econd, we examine re"enue 3I,G5. The "aria#le is constructed #ased on the hypothesis that
the com#ination of two #usinesses may allow for accelerated top)line growth as a result of items
such as a #roadened product offering, expanded distri#ution channel opportunities, and impro"ed
geographic scope. The firms can also deri"e re"enue)enhancing synergy #y selling the products
and ser"ices to each others customer #ase. I,G is scaled #y total assets at year)end to o#tain a
comparati"e size)adjusted measure.
The third "aria#le seeks to examine the margin 3MI85 on each dollar of re"enue. !t is
defined as ,H!T-A di"ided #y sales re"enue. The greater the "alue of margin, the lower the
operating costs per unit of re"enue. ,conomies of scale in areas such as raw material
procurement, manufacturing, distri#ution and marketing often allow for higher margins for the
com#ined entity than for the aggregate of the two separate #usinesses. *urther, redundant
acti"ities such as accounting, legal and administration can often #e downsized, leading to greater
profita#ility. MI8 attempts to proxy for this expansion in operating margin.
,mployment 3,MD5, measured as the annual percentage change in the num#er total num#er
of employees each year, is our fourth "aria#le. *or years #efore the merger, the total num#er of
employees is the sum of the #idder and target total employee figure. !n the years after the merger,
'$
we use the total employee figure for the #idder. This "aria#le pro"ides an indication of cost
reductions following a merger or acquisition through changes in the la#or #ase. 6hleifer and
6ummers 3$%%@5 argue that firms ha"e an opportunity to negotiate explicit and implicit la#or
contracts in a takeo"er and achie"e lower unit costs.
7ext, we measure !ndustry Ielatedness 3I,FAT,5 as a proxy for operational economy of
scale?scope and the hypothesis that mergers of companies in related industries is likely to #e
more synergistic than conglomerate mergers. I,FAT, is a dummy "aria#le equal to one if the
#idder and target operate in the same industry group as classified #y the 0)digit primary 6!.
code. Bnrelated mergers are conglomerate mergers and ha"e a "alue of zero. /hile research
studies show that unrelated di"ersifications tend to yield poor results, related di"ersifications,
mergers, and acquisitions into a field that is close to the acquiring firms main line of #usiness
tend to ha"e a more impressi"e track record as indicated #y Herger and Afek 3$%%15. A study #y
.omment and Jarrell 3$%%15 also show that increased corporate focus tends to #e associated with
higher share "alues. Hrailsford and Enights construct a "aria#le that measures internal firm
di"ersification #ased on segment re"enue. Aur sample includes transactions that resulted in a
change in ownership and the targets were acquired completely #y the #idder. Therefore, for our
sample, a dummy "aria#le is a more appropriate proxy for the synergy resulting from related
di"ersification instead of the segment re"enue analysis.
*inally, we examine de#t ratio 3FGI85 measured as total lia#ilities di"ided #y total assets as
a proxy for financial synergy arising from unused de#t capacity. 6udarsanam 3$%%25 mentions
the tax ad"antage of unused de#t capacity in either the #idder or target and uses the a#solute
difference #etween #idder and target in the ratio of total lia#ilities and total assets as a proxy.
Hrailsford 3$%%@5, on the other hand, measures the effecti"e tax rate to proxy for the tax #enefit
''
from unused carry)forward tax losses in the target, which the acquirer is a#le to utilize and offset
against its taxa#le income. 6ince, all the companies in our sample were profita#le #efore the
merger, we exclude the tax "aria#le used #y Hrailsford and Enights and include FGI8 as a
proxy for financial synergy from unused de#t capacity.
$.) Model Specifications
!n order to analyze the relationship #etween the performance measure and the
hypothesized explanatory "aria#les, the following regression is estimated for #oth the pre) and
post) merger periods using the three)year a"erage "alue of each "aria#le<
Q Q Q ) Q Q
C&O 2 34 5 31M6#S 5 32/-7 5 3$M/8 5 3(-MP 5 3)/-9#-5 3:97/8 5 ;
where, the signs a#o"e the "aria#le indicate the expected impact of that particular
independent "aria#le on the dependent "aria#le, holding constant the other "aria#les, and
is the stochastic distur#ance term.
/e modify the #asic model #y calculating industry)adjusted cash flow returns 3A.*A5 as
differences #etween "alues for the merged firm and its weighted)a"erage industry median
estimates, as indicated in Lealy et. al 3$%%'5. !n addition, for the I,G and MAI8!7 "aria#les,
we control for industry)wide effects #y su#tracting the industry a"erage of the rele"ant "aria#le
and denote these AI,G and AMAI8!7 3A for adjusted5. The resulting regression equation is
shown #elow<
C&O 2 34 5 31M6#S 5 32/-7 5 3$M/8 5 3(-MP 5 3)/-9#- 5 3:97/85 ;
Hased on Hrailsford and Enights 3$%%@5 we also form a set of new "aria#les, which are
defined as the difference #etween three)year a"erage post) and pre)merger period "alues. *or
example, A.*A-!** is defined as A.*ADA6T P A.*ADI,. A.*ADA6T is the a"erage "alue for the
'&
three years after the merger, whereas A.*ADI, is the a"erage "alue for the three years #efore the
merger. !n calculating the a"erage A.*ADA6T "alue, we take the sum of the numerator for all
three years after the merger 3in this case ,H!T-A5 and di"ide that #y the sum of the denominator
for all three years after the merger 3in this case Total Assets5. This allows for a direct test of the
association #etween changes in adjusted .*A and changes in the explanatory "aria#les. The
regression #ecomes<
C&ODI&& 2 34 5 31M6#SDI&& 5 32/-7DI&& 5 3$M/8DI&& 53(-MPDI&&5 3)97/8DI&& 5 ;
An alternati"e specification uses AMI87 as the dependent "aria#le. This is done to test
whether or not AMI87 is a #etter measure of impro"ed firm performance. The equation is
therefore modified as follows<
M/8 2 34 5 31M6#S 5 32/-7 5 3$-MP 5 3(/-9#- 5 3)97/85 ;
/e further categorize the mergers into related "ersus conglomerate to examine whether
the nature and magnitude of synergies differs. !n addition, we classify the mergers as successful
or unsuccessful #ased on our cash flow return measure to test how the impact of the explanatory
"aria#les "ary and whether or not synergies are truly #eing realized in the successful mergers and
the magnitude of those synergies.
'0
Chapter (: -stimating the Impact of Synergies
!n this chapter, we su#ject our hypothesis to empirical tests. /e #egin with a discussion
of the sample from which the e"idence is drawn and the data statistics. *irst, we identify the #est
proxy "aria#les for the estimation of synergies from mergers. Then we test the impro"ements in
firm performance as measured #y our cash flow return measure #y regressing the selected
proxies on the entire sample. /e further separate the sample according to success or failure of
the transaction as measured #y the cash flow return.
(.1. Sample Selection and Data
The tests use accounting data collected from company financial statements a"aila#le
through .ompustat "ia *actset Iesearch 6ystem for &( large mergers, #etween B.6. pu#lic
industrial firms, during $%%')$%%9. All data is measured in nominal B6 dollars. /e select three
years on either side of the year in which the merger took place as the window for examination.
Three years is sufficiently long enough to allow for the effects of the merger to materialize #ut
short enough to minimize impact of other influences. The year of the merger is excluded #ecause
of potential distortions induced #y accounting for the merger. A similar adjustment is also made
#y Lealy 3$%%'5. This sample period was chosen to focus on recent mergers and to ha"e
sufficient postmerger performance data.
/e originally identified 1( largest mergers that had taken place in the period of analysis.
/e limited the num#er of mergers and acquisitions to 1( to make the hand data collection tasks
managea#le. The list of acquirer and target firms is o#tained from the Mergerstat data#ase. -ue
to una"aila#ility of financial data, the sample size was then reduced to &(. As Lealy et al. 3$%%'5
point out, the largest acquisitions ha"e se"eral important ad"antages o"er a similarly sized
'1
random sample. *irstly, if there are economics gains from a merger, they are most likely to #e
detected when the target firm is large. 6econdly, the financial press and academic experts are
more concerned a#out the largest acquisitions #ecause of their impact on the economy and
industry as a whole.
!n order for the merger to #e included in the sample, the target and acquirer are non)
financial B6 companies listed on 7A6-AR, 7S6,, or AM,C. 7on)B6 firms and pri"ate
companies are not included in the sample #ecause of the lack of post)acquisition financial
information on these mergers. Iegulated 3railroads and utilities5 and financial firms are excluded
#ecause they are su#ject to special accounting and regulatory requirements, and are therefore
difficult to compare with other firms.
A summary of the sample is pro"ided in the Appendix $ 3pg 1$5. The information
pro"ided includes target and acquiring firms names, a description of their #usinesses, size of the
deal and the merger announcement and completion dates. The sample targets and acquirers
represent a wide cross)section of industries. The target firms #elong to '9 industries according to
primary 6!. codes= the acquiring firms come from '% industries.
The transactions are approximately e"enly distri#uted o"er the sample years< one
transaction in the sample :Appendix ' 3pg 105; was completed in $%%0, fi"e in $%%1, nine in
$%%2 and $1 in $%%9. The sample firms postmerger performance is likely to #e influenced #y
economywide changes. Aur tests, therefore, control for these factors #y normalizing sample
firms performance #y performance of corresponding industry.
#a*le (.1 summarizes the "aria#les which proxy for the synergies and the impro"ement
in performance from mergers.
'2
#a*le (.1. Pro<y 7aria*les for Synergies and #heir Definitions
7aria*le
Pro<y for: Definition
C&O !mpro"ement in merged firm performance 3,arnings Hefore !nterest, Taxes, -epreciation
and Amortization5 ? Total Assets
M6#S ,nhanced market power, potential for price setting 7et 6ales of the !ndi"idual *irm ? 7et 6ales of the !ndustry
/-7 Ie"enue 6ynergy 3increased sales5 7et 6ales ? Total Assets
M/8 ,conomy of 6cale 3cost reduction5 3,arnings Hefore !nterest, Taxes, -epreciation
and Amortization5 ? 7et 6ales
-MP Fower unit costs .hange in num#er of employees as a percentage of
num#er of employees in the pre"ious year
/-9#- ,conomy of 6cale?scope -ummy "aria#le equal to $ if the #idder and target operate
in the same industry determined #y the primary 6!. code
97/8 *inancial 6ynergy -ifference in the ratio of Total Fia#ilites to Total Assets
of the #idder and target
!ndi"idual company data are adjusted for economy or industry wide changes #y
su#tracting the peer a"erage from the sample firm "alue. The data for sample firms are excluded
when calculating the peer a"erage. Drimary 6tandard !ndustry .lassification 36!.5 .odes are
used for the target and acquirer in #oth the premerger and the postmerger analysis. !ndustry data
are collected from the Moodys *!6 Anline Hackfile .-.
6ome "aria#les will experience changes dues to market and industry influences, there#y
distorting time)series comparisons. To control for contemporaneous #ut unrelated e"ents, we
adjust the "aria#les .*A, I,G and MI8 for their industry trends. These "aria#les are therefore
renamed as A.*A, AI,G and AMI8 3A for adjusted5.
(.1.1. Descriptive Statistics
#a*le (.2 pro"ides descripti"e statistics of the raw annual performance measure 3cash
flow from operations5 from three years prior to three years post the date of merger. The data
indicate that there is a drop in #oth the mean and median .*A following the acquisition. *or
'9
#a*le: (.$. nnual Percentage C&O /eturn Pre= and Post= Merger
t=1 t=2 t=$ #otal Pre=Merger t51 t52 t5$ #otal Post=Merger
>o: &( &( &( %( &( &( &( %(
Median: 2.@2 2.(% 9.0' 2.9& 1.&2 '.1' '.&& &.%%
Mean: 2.2' 9.'0 9.(' 2.%2 2.1$ 0.&9 0.$0 1.($
instance, the mean .*A return in each of the three years #efore the merger is $9.1&K and falls to
$1.(@K in the three years following the merger. A similar decline in .*A has #een noted #y
Lealy 3$%%'5 and Hrailsford 3$%%@5, #ut these num#ers need to #e further examined in light of
the industry mo"ements.
#a*le: (.2. nnual Percentage C&O /eturn Pre= and Post= Merger
t=1 t=2 t=$ #otal Pre=Merger t51 t52 t5$ #otal Post=Merger
>o: &( &( &( %( &( &( &( %(
Median: $2.@$ $2.%( $1.(0 $2.0% $&.%$ $'.9% $0.&( $&.20
Mean: $@.(@ $9.11 $2.%1 $9.1& $1.21 $0.2( $1.(( $1.(@
7otes< .*A is defined as earnings #efore interest, taxes, depreciation and amortization scaled #y total assets.
The period MDreN co"ers all three years prior to the merger.
The period MDostN co"ers all three years following the merger.
#a*le (.$ presents the descripti"e statistics of the peer)adjusted .*A 3A.*A5. The
figures indicate that there is a similar drop in #oth the mean and median A.*A following the
merger. ,"en though the firms perform #etter than the peers on a"erage, the peer)adjusted .*A
figures show continued under)performance after the merger.
7otes< A.*A is defined as .*A less the peer a"erage .*A for each period t.
The period MDreN co"ers all three years prior to the merger.
The period MDostN co"ers all three years following the merger.
!n order to directly compare the relationships #etween the pre) and post)merger periods,
we form a set of new "aria#les, which are defined as the difference #etween post) and pre)merger
period "alues. #a*le (.( presents the descripti"e statistics of these new "aria#les. All the
"aria#les, except for I,FAT,, which is a dummy "aria#le, are ratios measured in percentages.
Hased on the descripti"e statistics, on a"erage, there is a decrease in cash flow of (.@K. MET6
indicates that #idders increase their market share #y around 9K in the years following an
'@
acquisition. The increase in the mean "alue of AI,G indicate that #idding firms #ecome more
efficient in utilizing their asset #ase to generate re"enue in the post)merger years, #ut are una#le
to translate this into enhanced cash flow from operations. An the other hand, it appears that
#idders experience an increase in costs in the post)acquisition period #ased on the negati"e mean
"alue of AMI8. ,mployment growth seems to decrease after the merger and is consistent with
the claim that #idders retrench large num#er of employees following acquisitions. An a"erage,
the merged entities also appear to #e increasing their de#t capacity, although this could #e partly
due to the way the acquisitions are financed.
#a*le (.(. Descriptive Statistics of Dependent 7ari*les and -<planatory 7aria*les
7aria*le Mean Median Ma<imum Minimum
A.*A-!** )(.((@ )(.($$ (.$(& )(.$0&
MET6-!** (.(9( (.(&% (.&(1 )(.'(%
AI,G-!** (.($0 (.(0' $.2@0 )$.90%
AMI8-!** )(.((9 (.((@ (.(%1 )(.$1@
,MD-!** )(.(0% )(.(0( (.12% )(.2&2
I,FAT, ) ) ) )
FGI8-!** (.($% (.('$ (.'($ )(.''2
&or complete -7ie,s descriptive statistics printout? see ppendi< 2 on pg. )2
(.1.2 Outliers in the Sample
-ue to the small sample, outliers in the data may affect the descripti"e statistics. !n order
to get a sense of the outliers and the relationship #etween the independent "aria#les and the
dependent "aria#le on a preliminary #asis, we conduct a #i"ariate analysis. &igure (.1 displays a
scatter plot of the dependent "aria#le against all the independent "aria#les. The plots indicate a
direct relationship #etween AMI8-!** and AI,G-!** and the dependent "aria#le and no
significant relationship #etween ,MD-!**, FGI8-!** and MET6-!**. This seems to #e
partly caused #y the outliers in the sample.
'%
-0.2
-0.1
0.0
0.1
-0.2 -0.1 0.0 0.1 0.2
ACFO_DIFF
A
M
A
R
G
I
N
_
D
I
F
F
-2
-1
0
1
2
-0.2 -0.1 0.0 0.1 0.2
ACFO_DIFF
A
R
E
V
_
D
I
F
F
-1.0
-0.5
0.0
0.5
1.0
-0.2 -0.1 0.0 0.1 0.2
ACFO_DIFF
E
M
P
L
O
Y
_
D
I
F
F
-0.3
-0.2
-0.1
0.0
0.1
0.2
0.3
-0.2 -0.1 0.0 0.1 0.2
ACFO_DIFF
L
E
V
E
R
A
G
E
_
D
I
F
F
-0.4
-0.2
0.0
0.2
0.4
-0.2 -0.1 0.0 0.1 0.2
ACFO_DIFF
M
K
T
S
H
_
D
I
F
F
0.0
0.2
0.4
0.6
0.8
1.0
-0.2 -0.1 0.0 0.1 0.2
ACFO_DIFF
R
E
L
A
T
E
&igure (.1
(.1.$. Correlation Matri<
#a*le (.) reports the correlation matrix for dependent and explanatory "aria#les.
#a*le (.). Correlation Matri< of Dependent and -<palnatory 7aria*les
A.*A-!** AMI8-!** AI,G-!** ,MD-!** FGI8-!** MET6-!** I,FAT,
A.*A-!** $.(((
AMI8-!** (.2@9 $.(((
AI,G-!** (.1$0 (.$02 $.(((
,MD-!** )(.((& )(.$&0 (.'%' $.(((
FGI8-!** )(.($0 (.(@@ (.$2@ (.('( $.(((
MET6-!** (.((' )(.(&& (.$(1 (.(0' (.&9% $.(((
I,FAT, (.'&@ (.($0 (.$@0 )(.(1$ (.$($ (.($9 $.(((
&or complete -vie,s correlation matri< printout? refer to the ppendi< $? pg. )(
The correlations in"ol"ing the cash flow measure with AMI8-!** 3(.2@95 and AI,G-!**
3(.1$05 are supporti"e of the hypothesized relationships. The correlation matrix indicates low
&(
#a*le (.@. Selected O9S /esults on the -ntire Sample ,ith Different Dependent 7aria*les
-!uation M/8DI&& /-7DI&& -MPDI&& 97/8DI&& M6#SDI&& /-9#- DA /B2
,q. 0.2.$ 4.@41 4.4$C )(.((@ )(.$$' (.('& (.('(1 (.2$9
A.*A-!** 3(.$$'5 3(.($'5 3(.(&'5 3(.(@'5 3(.(295 3(.($15
,q. 0.2.' ) (.('( )(.(1& (.(2& )(.(02 )(.((1 )(.$'%
AMI8-!** ) 3(.('$5 3(.(125 3(.$095 3(.$'$5 3(.('25
7ot e< 6tandard ,rror is report ed in parent heses. 6ignificant coefficient s are #olded.
&or -vie,s printout? refer to ppendi< (? pg. ))
collinearity among the independent "aria#les. There is a modest correlation #etween FGI8-!**
and MET6-!** and #etween ,MD-!** and AI,G-!**. !n general, the explanatory "aria#les
are not su#ject to multicollinearity.
(.2 -mpirical #ests and /esults
The empirical analysis of the paper has #een carried out in four major steps. *irst, we
experiment with two different dependent "aria#les on the entire sample to test which model is a
#etter measure for synergies. 6econd, we modify the dependent "aria#le chosen to test whether
or not the period of analysis has an impact on the realization of synergies. /e then classify the
mergers as related and conglomerate #ased on primary 6!. codes to see which group of
mergers perform #etter. *inally, we classify the mergers as successful and unsuccessful to test
which explanatory "aria#les ha"e the greatest impact on the performance of the mergers.
(.2.1 /egression /esults of Different Measures of Performance Improvement
/e measure performance impro"ements as a result of the realization of synergies from
mergers in two ways< i5 A.*A, which equals ,H!T-A deflated #y total assets adjusted for
industry)wide changes and ii5 AMI8, which equals ,H!T-A deflated #y net sales adjusted for
industry)wide changes. !n -!. (.@.1, AMI8 is used as an explanatory "aria#le. !n order to
determine the #est measure of performance impro"ement we also consider it as a dependent
"aria#le in -!. (.@.2
#a*le (.@ reports the regression results using the two measures of performance
impro"ement as the dependent "aria#le.
&$
A.*A-!** appears to #e the superior measure as the explanatory "aria#les ha"e the correct sign
3except FGI8-!**5 and the model has an *)statistic of @.@ compared to (.&& in the AMI8-!**
model. The "alues of the adjusted I)squared also suggest that -!.(.@.1 explains the realization
of synergies #etter when A.*A-!** is used as a dependent "aria#le. Anly the coefficients of
AMI8-!** and AI,G-!** are significant at the 1K le"el, indicating that acquirers make
#etter utilization of their assets, increase re"enue and realize cost sa"ings after the merger. The
cost sa"ings cannot #e attri#uted to the reduction in employee expenses due to the insignificance
of ,MD-!**. /e also find no e"idence of the realization of financial synergy resulting in higher
cash flows. FGI8-!** fails to capture the hypothesized effect of a lower cost of capital
resulting from more sta#le and predicta#le cash flows of the com#ined entity. I,FAT, is also
insignificant at the 1K le"el and therefore does not support our hypothesis that mergers of firms
in the same industry realize greater operating synergy. /e further test this notion in Section (.2.$
#y splitting our sample into related "ersus unrelated mergers.
(.2.2 /egression /esults: Pre=Merger verage gainst Post=Merger Individual Dears
6ynergies from mergers are more likely to show up o"er time. !n order to test whether or
not the synergies are #eing realized a year after the merger or o"er a longer period of time, we
modify the methodology in capturing the difference in performance. *or instance, in calculating
A.*A-!** we take the difference #etween the pre)merger a"erage A.*A and the post)merger
"alues of a particular year. This can #e mathematically expressed as follows<
&'
A.*A-!** O A.*ADA6TtQn ) A.*ADI,a"g, where t O merger year, n O $, ' or &
#a*le (.: summarizes the regression results from using three different post)merger years
as a #asis for comparison. -!.(.:.1 compares performance one year after the merger to pre)
merger a"erage and indicates that only AMI8-!** has a significant effect on cash flow from
operations. This could #e due to the initial cost cutting after the completion of the merger. The
insignificance of other explanatory "aria#les indicates that one year is too short a period for
synergies to #e realized. The mean of the dependent "aria#le is almost zero, showing no
impro"ement from the merger within one year.
#a*le (.:. Selected O9S /esults on the -ntire Sample ,ith Different Dependent 7aria*les
Dependent 7aria*le:
-!uation M/8DI&& /-7DI&& -MPDI&& 97/8DI&& M6#SDI&& /-9#- DA /B2
,q. 0.9.$ 4.@(C (.(&1 )(.($% )(.$0& (.($( (.((@ (.1('
A.*A-!** 3(.$'%5 3(.('$5 3(.('05 3(.(%$5 3(.(@'5 3(.($%5
,q. 0.9.' 4.@2) 4.4CE )(.(&@ )(.(1$ )(.('% (.('' (.11%
A.*A-!** 3(.$'05 3(.('$5 3(.(&15 3(.$((5 3(.(%15 3(.($%5
,q. 0.9.& 4.(C@ 4.4:$ (.(0$ )(.$&% (.((0 (.('$ (.&@&
A.*A-!** 3(.$&%5 3(.('05 3(.(&95 3(.$(@5 3(.(%'5 3(.('05
7ot e< 6t andard ,rror is report ed in parent heses. 6ignificant coefficient s at t he 1K le"el are #olded.
&or -vie,s printout? see ppendi< (? pg. )@
C&ODI&& 2 C&OPOS#
t5n
= C&OP/-
avg

-!.(.:.2 compares pre)merger a"erage "alues to post)merger "alues two years after the
merger. !n the second year of the merger, re"enues seem to increase. !t is also possi#le that post)
merger impro"ements in AI,G arise from the sale of assets with low turno"er. AMI8-!** and
AI,G-!** also ha"e a significant effect on cash flow three years after the merger as indicated
#y -!.(.:.$.
/e also compare post and pre)merger performance on a year)to)year #asis, such as, t)$
"ersus tQ$. The results are similar and thus not reported here.
(.2.$ /egression /esults: /elated versus Conglomerate Mergers
&&
!n order to examine whether nature of synergies differs in mergers in"ol"ing unrelated
#usiness, we di"ide the sample into $& related mergers and $9 conglomerate mergers. #a*le (.E
reports the regression results from the modified sample.
#a*le (.E. Selected O9S /esults on /elated 7ersus Conglomerate Mergers
Dependent 7aria*le:
-!uation M/8DI&& /-7DI&& -MPDI&& 97/8DI&& M6#SDI&& DA /B2
,q. 0.@.$ (.&0( 4.4:) =4.21E (.($% )(.$@( (.2$9
A.*A-!** 3(.$@95 3(.($95 3(.(115 3(.$'95 3(.$2'5
,q. 0.@.' 4.(C1 4.4$C (.(0% (.(%0 (.(&1 (.1@'
A.*A-!** 3(.$@&5 3(.($@5 3(.(025 3(.$0@5 3(.(@'5
7ot e< 6t andard ,rror is report ed in parent heses. 6ignificant coefficient s at the 1 K le"el are #olded.
&or -vie,s printout? see ppendi< ( pg. ):
C&ODI&& 2 C&OPOS#
avg
= C&OP/-
avg

-!. (.E.1 shows that AI,G-!** and ,MDFAS-!** ha"e a positi"e effect on the cash flow of
the acquirer #uying a firm in the same industry and is statistically significant at the 1K le"el. The
mean of the dependent "aria#le is 2K, showing that on a"erage the synergies from a merger of
companies in the same industry are realized in the form of increased cash flow. The impact of
the coefficient of AI,G-!** on A.*A-!** supports the #elief that operating synergies are
greater in related mergers due to higher managerial expertise and pricing power. !n addition,
operating synergies resulting from the elimination of redundant resources is reflected in the
higher "alue of the coefficient of AI,G in -!.(.E.1 when compared to -!.(.E.2. .ost sa"ing
synergies associated with reducing the num#er of employees is also #eing accomplished in the
related mergers as indicated #y the statistically significant negati"e coefficient of ,MD-!** in
-!.(.E.1. The negati"e $.@K mean of the dependent "aria#le in -!.(.E.2 shows that on a"erage
unrelated mergers fail to #oost cash flows of the acquirer. This finding is consistent with Jensens
3$%@25 "iew that conglomerate mergers are less likely to succeed, since managers of acquiring
firms are not familiar with the industry of the target company. These results are further supported
&0
#y the findings of Lealy 3$%%'5 that post)merger operating performance is greater among
mergers that are classed as ha"ing a high degree of o"erlap.
(.2.( /egression /esults: Successful versus Fnsuccessful Mergers
/e classify the mergers as successful or unsuccessful #ased on the A.*A-!** "alues.
Mergers with positi"e A.*A-!** "alues are classified as successful and "ice "ersa. #a*le (.C
summarizes the regression results from the separated sample of successful and unsuccessful
mergers.
!n -!.(.C.1, AMI8-!** and AI,G-!** are significant indicating that successful mergers
experience an increase in cash flow from operations, in the form of increased re"enues or higher
asset producti"ity and cost sa"ings. ,"en though the rest of the explanatory "aria#les ha"e the
expected sign, they are not statistically significant. Therefore, we are una#le to attri#ute the "alue
creation from the mergers to these "aria#les. The mean of the dependent "aria#le in this equation
is 1K. !n -!.(.C.2? none of the "aria#les are significant and the mean of the dependent "aria#le is
P1.'K. The low adjusted I)squared also highlights the pro#lems resulting from a small sample
size and low degrees of freedom. The unsuccessful mergers show some signs of cost sa"ings, #ut
this is inconclusi"e due to the lack of significance.
&1
#a*le (.C. Selected O9S /esults on Successful 7ersus Fnsuccessful Mergers
Dependent 7aria*le:
-!uation M/8DI&& /-7DI&& -MPDI&& 97/8DI&& M6#SDI&& /-9#- DA /B2
,q. 0.%.$ 4.(:( 4.4(E )(.((@ (.(@% (.($' (.($2 (.9$&
A.*A-!** 3(.$9'5 3(.((%5 3(.('25 3(.(915 3(.(125 3(.($'5
,q. 0.%.' (.'&9 (.((1 (.(29 )(.$9$ (.(9$ (.((@ (.$$'
A.*A-!** 3(.$225 3(.($95 3(.(0&5 3(.$(05 3(.(@'5 3(.($@5
7ot e< 6t andard ,rror is report ed in parent heses. 6ignificant coefficient s are #olded.
&or -vie,s printout? see ppendi< ( on pg. )E
C&ODI&& 2 C&OPOS#
avg
= C&OP/-
avg

Chapter ): Case Studies of Mergers
!n this chapter, we perform case studies of four mergers that are classified as successful
and unsuccessful #y our model #ased on industry)adjusted cash flow from operations. The
regression results outlined in .hapter 0 fail to pro"ide tangi#le e"idence on the sources of
synergies from mergers.
!n conducting a case study, we summarize the reports from the financial press e"aluating
the merger pre and post)completion and compare the analysis with the findings from our model.
The successful mergers we analyze are 8illette 4 -uracell and Bltramar 4 -iamond 6hamrock
and the unsuccessful mergers are &.om 4 B.6. Io#otics and Hoeing 4 Mc-onnell -ouglass.
).1 8illette + Duracell Merger
).1.1.Overvie, of the Merger
/hen consumer products manufacturer 8illette .o. announced in 6eptem#er of $%%2 its
intent to purchase #attery maker -uracell !nternational !nc. for +9.$ #illion in stock
&
, share prices
of #oth firms soared. /all 6treet looked fa"ora#ly upon the deal, which linked -uracell, maker
of the worlds #est selling #atteries, with 8illettes major glo#al distri#ution and marketing
networks.
).1.2.Mar.et &orces Driving the Merger
Hetween $%%( and $%%2, more than 0(K of 8illettes sales had come from new products
and its earnings had increased nearly $9K annually. To continue growing, the firm needed to find
means of expansion. An the other hand, in $%%2, -uracell was the largest alkaline #attery maker
&
M8illette)-uracell Merger Appro"ed,N Business Wire, -ecem#er $%%2
&2
in the world, with nearly 1(K of the B.6. market and annual re"enues of +'.& #illion. The #attery
manufacturer, intrigued #y 8illettes international prowess, was also interested in a merger.
-uracells international efforts had just #egun to reach many major markets in outside of the B.6.
and ,urope, and 8illettes international marketing and distri#ution resources would gi"e
-uracell glo#al reach.
0
).1.$./evie, of the Outcome
Management expected the deal to accelerate -uracells top)line growth, #oost margins
and lower the companys expected tax #ill. !n general, -uracell has li"ed up to the expectations.
*or example, in $%%9 -uracells sales and operating profit grew $(K and $9K respecti"ely. !n
$%%@, the firm introduced the -uracell Bltra, a new line of alkaline AA and AAA #atteries.
-uracell also #ought !ndias 8eep, as well as Iocket, the leading #attery maker in 6outh Eorea.
1
EEI, which shared in the risk of attaining deal synergies through its 2.%K stake in 8illette,
sold one)third of its position to the pu#lic in $%%% after enjoying a 1(K stock price increase.
2
This indicated that the synergies from this merger were realized.
).1.(.Model -stimates
#a*le ).1 summarizes the results we o#tain from the analysis of the 8illette 4 -uracell
merger using our model. The increase in AI,G and AMI8 clearly indicates that the
managements expectation of the merger #oosting margins and top)line growth has #een realized.
0
Maremont, M., MLow 8illette /owed /all 6treet,N Husiness /eek, 6eptem#er $%%2.
1
M-uracell !nternational !nc.,N Notable Corporate Chronologies, The 8ale 8roup, $%%%.
2
Mau#oussin, M.J. and Liler, H., MFets Make a -eal,N $%%@, .6*H *rontiers of *inance.
&9
Table 5.1. Gillette & Duracell
PRE AVG POST AVG POST- PRE
ACFO 6% 23% 1%
AMRG % 16% !%
AREV -18.!% -0.16% 1!%
MKTS 81% !6% 14%
LVRG 60% 61% 1%
EMP 4% -1% -5%
).2 Fltramar + Diamond Shamroc. Merger
).2.1.Overvie, of the Merger
The $%%2 merger of Bltramar .orp. and -iamond 6hamrock !nc. formed the third)largest
independent petroleum company in the B.6. The new firm had oil refineries and retail units in
.anada and much of the B.6.
).2.2.Mar.et &orces Driving the Merger
/hen the B.6. oil and gas industry experienced a consolidation trend in the $%%(s,
Bltramar and -iamond 6hamrock felt o#ligated to participate. Hy uniting, these two petroleum
companies created the largest independent oil refiner and marketer. Bltramar operated in
.alifornia, the northeast B.6. and eastern .anada, whereas -iamond 6hamrock operated in the
southwest B.6. The new company expected to #enefit from geographic expansion and operating
synergies #y le"eraging the strengths of the two companies in petroleum refining and marketing.
The company projected sa"ings of +91 million?year resulting from #etter operating efficiency
and reduced o"erhead and administrati"e costs.
9
9
MBltramar, -iamond 6hamrock agree to merge,N Oil & Gas Journal, 6eptem#er $%%2.
&@
).2.$./evie, of the Outcome
As a result of com#ined operations, the new companys capital spending in $%%9 dropped
to +'@1 million from a com#ined total of +0&( million in $%%2. At the end of $%%9, its first full
year of operation, Bltramar -iamond 6hamrock reported net income of +$(.% #illion. At the
conclusion of the merger, the newly formed company reduced '(( jo#s and in January $%%%
announced plans to restructure retail marketing and refining operations eliminating &(( more
positions. The total workforce reduction since the formation of Bltramar -iamond 6hamrock
reached $&((.
@
).2.(.Model -stimates
#a*le ).2 summarizes the results we o#tain from the analysis of the Bltramar 4 -iamond
6hamrock merger using our model. The increase in re"enue resulting from geographic expansion
can #e noted from the significant increase in AI,G. The reduction of o"erhead costs is captured
#y the decrease in ,MD in the post)merger years. The negati"e "alue of AM8I is likely to #e a
result of the increase in re"enues, which is the denominator in AM8I. !n this case, the model
indicates that the synergies from the merger ha"e #een realized.
Table 5.2. Ultramar & Diamond Samroc!
PRE AVG POST AVG POST- PRE
ACFO -5% 1% 6%
AMRG -4% -6% -2%
AREV 11% 45% 34%
MKTS 1% 2% 1%
LVRG 6% 1% 4%
EMP 18% 14% -5%
@
MBltramar 4 -iamond 6hamrock,N $%%%, .ases in .orporate Acquisitions, Mergers and Takeo"ers, 8ale 8roup.
&%
).$ $Com + F.S. /o*otics Merger
).$.1.Overvie, of the Merger
The +@.1 #illion merger of &.om .orp. and B.6. Io#otics .orp in $%%9, the largest
merger in the history of the computer networking industry, created a networking industry giant
second only to .isco 6ystems.
%
The &.om product line grew from network interface cards and
enterprise systems to include remote access networking products and modem. &.om and B.6.
Io#otics expected to sa"e on research, de"elopment, general and administrati"e costs.
).$.2.Mar.et &orces Driving the Merger
The networking industry as a whole saw an unprecedented le"el of consolidation in $%%9.
The .,As of #oth &.om and B.6. Io#otics pointed to client demand as the major factor for their
merger. B.6. Io#otics, a leader in /A7 equipment, lacked the FA7 technology offered #y
&.om. B.6. Io#otics could also pro"ide access to new distri#ution channels to &.om in !nternet
access companies and retail outlets #esides ser"ing its own corporate market.
$(
As sales of
networking products to small #usinesses were growing, an access to this market would gi"e
&.om a competiti"e ad"antage.
).$.$./evie, of the Outcome
As predicted #y many analysts &.om struggled in the months following the merger. This
was #ecause the firm faced the daunting task of integrating o"er @(( products. This in addition to
an in"entory glut caused stock prices to tum#le. -espite increased re"enues, &.om posted a
+1$.' million loss in the first quarter of $%%@, due mainly to the in"entory pro#lem.
$$
&.om was
%
M& .om 4 B.6. Io#otics,N $%%%, .ases in .orporate Acquisitions, Mergers and Takeo"ers, 8ale 8roup.
$(
M& .om 4 B.6. Io#otics,N $%%%, .ases in .orporate Acquisitions, Mergers and Takeo"ers, 8ale 8roup.
$$
Herinato, 6., &.om)B6I Merger 8oes *orward,N PC Week, June $%%9.
0(
a#le to get #ack on track in the first quarter of $%%% and #eat /all 6treet forecasts. After the
merger, &.om was a#le to position itself as the only supplier offering end)to)end connecti"ity to
all of the networking industrys strategic markets. Management considered this to #e a direct
result of the merger.
).$.(.Model -stimates

Table 5.". "#om & U.S. Robotic$
PRE AVG POST AVG POST- PRE
ACFO 15% 1% -14%
AMRG % 1% -6%
AREV 25% 10% -15%
MKTS 21% 16% -4%
LVRG 38% 33% -5%
EMP 15% 14% -2%
#a*le ).$ summarizes the results we o#tain from the analysis of the &.om 4 B.6. Io#otics
merger using our model. Hased on our model, the merger is unsuccessful and no synergies ha"e
#een realized. Lowe"er, #ased on the re"iews from the financial press and management
disclosure, the merger can #e deemed successful. ,"en though the com#ined entity increases
re"enue and ,H!T-A, after normalizing #y total assets, the synergistic effect is no longer
o#ser"ed. !n essence, the merger did not achie"e greater asset producti"ity #ut synergies were
realized in terms of increased re"enues. Aur model appears to #e highly sensiti"e to the total
assets of the com#ined entity. The merger also achie"ed cost sa"ings in the form of reduced
employee expenses.
0$
).( 1oeing + McDonnell Douglas Merger
).(.1.Overvie, of the Merger
The $%%9 merger of Hoeing .o. and Mc-onnell -ouglas .orp. created the largest
aerospace firm in the world. Hoeing, which held the title of the worlds largest maker of
commercial jets since $%1@, instantly #ecame the worlds largest military aircraft manufacturer.
-espite dou#ling its annual re"enue to +01.@ #illion, "ersus +''.9 #illion in $%%2, the company
posted a net loss of +$9@ million in $%%9, its first loss in 1( years. Top executi"es at Hoeing
#lamed production pro#lems for the companys poor performance.
$'
).(.2.Mar.et &orces Driving the Merger
!n $%%2, Hoeing waged an $@)month o"erhaul of its entire production system, completely
re"amping the way it #uilt planes. At the same time, aircraft orders unexpectedly took off.
Hoeing tried to keep up with the greatest demand for new planes in history, #ut a parts shortage
forced it to shut down two production lines and a#sor# a charge of +$.2 #illion against
companys earnings. A merger with Mc-onnell -ouglass would secure for Hoeing factory space,
trained workers and increased capacity to handle the load. The strength of Mc-onnell -ouglas
military aircraft #usiness would also counter#alance Hoeings highly cyclical commercial jetliner
#usiness.
$&
).(.$./evie, of the Outcome
*rom the time the company completed the merger, it has had numerous write)downs
caused #y production pro#lems and product cancellations. !n a May $%%@ orbes article, Hoeing
.,A .ondit admitted that his focus on Hoeings recently acquired defense operations had cost
$'
MHoeing 4 Mc-onnell -ouglas,N $%%%, .ases in .orporate Acquisitions, Mergers and Takeo"ers, 8ale 8roup.
$&
MHoeing 4 Mc-onnell -ouglas,N $%%%, .ases in .orporate Acquisitions, Mergers and Takeo"ers, 8ale 8roup.
0'
the commercial airlines operations of Hoeing dearly.
$0
A Business Week article argued that the
task of making the merger work distracted top management from the #asic task of making and
selling jet airplanes at a profit. The culture clash at the top also made things difficult.
$1
!n $%%@,
Hoeing had announced that it would slim down employees #y $',((( to cut costs. /ith the
pro#lems mounting from missing orders, Hoeing held employment constant.
The outlook for Hoeing #rightened in June of $%%%. The company reported a record 2$
deli"eries that month and expected to deli"er an a"erage of 1( planes a month for the rest of
$%%%, at a time when esta#lished carriers continued to replenish aging fleets with more efficient
aircraft. As a result of this impro"ed performance the company posted re"enues in excess of +12
#illion in $%%%. !n '(((, Hoeing finally came #ack on track with operating margins in its
passenger)jet #usiness clim#ing from 0.'K in $%%% to @.%K in '((( and a cash flow of more than
+& #illion.
$2

).(.(.Model -stimates
#a*le ).( summarizes the results we o#tain from the analysis of the Hoeing 4
Mc-onnell -ouglas merger using our model.
Table 5.%. &oein' & (cDonnell Dou'la$
PRE AVG POST AVG POST- PRE
ACFO 3% 2% -1%
AMRG -% -10% -3%
AREV 54% 8% 33%
MKTS 50% 6!% 1!%
LVRG 61% 0% !%
EMP 3% 10% %
The model categorizes the merger as #eing moderately unsuccessful #ased on lower cash flow
returns in the post)merger years compared to pre)merger years. The synergies expected from this
$0
Hanks, L., M6low Fearner,N orbes, May $%%@.
$1
MFost in 6pace at Hoeing,N Business Week, April $%%@.
$2
Bseem, J., MHoeing "s. Hoeing, N Business Week, Acto#er '(((.
0&
merger were geared towards re"enue increase rather than cost cutting. This is reflected in the
increase in AI,G in the post)merger years. The increase in ,MD is indicati"e of the pooling of
resources Hoeing undertook with Mc-onnell -ouglas to co"er its order #acklog. Hoeing actually
lost some of its market share to Air#us after the merger. MET6 fails to capture this accurately.
Hased on the fact that Hoeing achie"ed a turnaround in performance, it leads us to #elie"e that
the synergies from the merger with Mc-onnell -ouglas were realized.
Chapter @: Conclusion
00
!n this chapter, we summarize the empirical findings and discuss the limitations of the study. /e
also highlight the contri#utions of this study to the existing literature and suggest possi#ilities for
further extension.
@.1 Summary of /esults
This study examined the performance of largest mergers specifically in terms of the
performance of the acquiring firms in the B.6. market o"er the period $%%' to $%%9. Drior
literature has almost exclusi"ely focused on share market returns as the performance measure.
These studies ha"e failed to document consistent e"idence supporting the notion of synergies
accruing to #idding firms. There are two schools of thought to explain these results. *irst, there
are concerns a#out market failure, which lead to non)"alue maximizing #eha"ior #y corporate
managers. 6econd, there are concerns o"er whether ex)ante share prices are the most appropriate
performance measure. Iecent studies ha"e suggested that realized returns #ased on financial data
may pro"ide alternati"e measures. Lowe"er, financial data is su#ject to the nuances of
accounting system. !n this paper, we use cash flow from operations as the performance measure.
This "aria#le o"ercomes some #ut not all of the pro#lems associated with the use of accounting
data.
The results indicate that there is a decline in post)merger cash flow returns after adjusting
for the industry)wide effect. Hrailsford and Enights 3$%%@5 indicate a similar decline in cash flow
performance #ut Lealy et al. 3$%%'5 find that performance of the merged entities actually
impro"es. Garious explanatory "aria#les proposed in the literature were examined for any
systematic relationship with cash flow performance measure. . /e find that the AM8I and
AI,G "aria#le can explain some of the changes in cash flow return measure after the merger.
01
Lowe"er, none of the other "aria#les are significant in explaining the change in performance
#etween the pre) and post)merger periods. /hen we test pre)merger a"erage performance with
post)merger indi"idual year performance, we find that the synergies take some time to #e
realized and ha"e the most effect on firm performance two years after the completion of the
merger.
The regression estimate of related "ersus conglomerate mergers indicates a difference in
the nature of the synergies. The related mergers realize synergies in terms of increased re"enues
and operating margin as well as reduced o"erhead costs #y eliminating redundant resources. The
unrelated mergers realize synergies in a similar fashion except there is no indication of a
reduction in o"erhead costs. An a"erage, the positi"e cash flow return from the related mergers,
compared to the negati"e cash flow returns from conglomerate mergers, supports our hypothesis
that mergers of companies in the same industry are more likely to succeed. This is consistent
with the findings of Lealy et al. 3$%%'5 that the post)merger operating performance is greater
among mergers that are classed as ha"ing a high degree of o"erlap.
The regression estimates of successful "ersus unsuccessful mergers indicate that the
successful mergers experience an increase in the cash flow return resulting from an increase in
operating margins and greater asset producti"ity. 7one of the explanatory "aria#les in the
unsuccessful mergers ha"e a significant impact.
The statistical e"idence supporting the hypothesis that, synergies realized from mergers
leads to impro"ed profita#ility and increased efficiency, is at #est weak. There is considera#le
"ariation from the central tendencies in the statistical a"erages. !ndi"idual cases are found to
pro"ide a #etter insight on the synergy moti"e for mergers. ,ach merger has a unique set of
characteristics and expects different types of synergies. Hy analyzing a "aried sample of mergers
02
altogether, "alua#le information on a particular merger is often mitigated. This is reflected in our
case study where we find that two of the mergers that were deemed unsuccessful #ased on the
cash flow return measure are actually considered to ha"e realized synergies #y the financial press
and the management. Aur performance measure, A.*A, appears to #e highly sensiti"e to total
assets of the com#ined entity. ,"en though a merger might ha"e realized re"enue synergies as
documented #y the increase in re"enues, it is not reflected in the form of a positi"e A.*A if the
total assets of the com#ined entity were not reduced. *or example, in the case of the Hoeing and
Mc-onnell -ouglas merger, the merger was expected to pool the resources of the two companies
so that Hoeing could co"er its order #acklog. Hoeing was a#le to successfully #oost its re"enue
#ecause of the merger #ut as the asset #ase was increased, A.*A came out to #e negati"e.
@.2 9imitations of the Study
/e ha"e a num#er of ca"eats to our results. *irst, the small sample size leads to a
pro#lem with degrees of freedom when conducting a regression analysis. 6econd, the presence of
outliers creates mixed signals, as there are instances where mean and median "alues pro"ide
opposite interpretations. Third, the measure of cash flow is a relati"ely crude measure as it still
includes some accruals and is su#ject to distortions induced #y accounting policies. *ourth, the
adjustments for industry effects rely upon correct industry classification and are su#ject in some
industries to outlier influence when there is little data a"aila#le within the industry. Moreo"er,
the research method implicitly assumes that the industry a"erage is the appropriate #enchmark
for performance.
09
@.$ -<tension of the Study
*urther studies should try to o#tain a larger sample and design #etter measures of
synergies and ha"e an appropriate normalizing "aria#le that is free from accounting distortions.
Iather than conducting a statistical analysis, it would #e #etter to conduct a fully case)style
research as each merger is likely to ha"e unique features. Garia#le measurement and aggregation
mask "alua#le information that may #e gleaned from case studies.
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8aughan, Datrick, 3$%%25 M Mergers, Acquisitions, and .orporate Iestructuring, N 7ew Sork,
John /iley 4 6ons.
8ale 8roup M-uracell !nternational !nc.,N Notable Corporate Chronologies, $%%%.
8ale 8roup, MBltramar 4 -iamond 6hamrock,N 3$%%%5, .ases in .orporate Acquisitions,
Mergers and Takeo"ers.
8ale 8roup, M& .om 4 B.6. Io#otics,N 3$%%%5, .ases in .orporate Acquisitions, Mergers and
Takeo"ers.
8ale 8roup, MHoeing 4 Mc-onnell -ouglas,N 3$%%%5, .ases in .orporate Acquisitions, Mergers
and Takeo"ers.
0%
Lealy, D.M., Dalepu, E.8. and Iu#ack, I.6., 3$%%'5, M-oes .orporate Derformance !mpro"e
after MergersTN, Journal of inancial Economics, Gol.&$, pp.$&1)$91.
Jensen, M. and Iu#ack, I., 3$%@&5, MThe Market for .orporate .ontrol< The 6cientific
,"idence,N Journal of inancial Economics, $$, pp.1)$(.
Jensen, M., 3$%@25, MAgency .osts of *ree .ash *low, .orporate *inance and Takeo"er,N
#merican Economic &e(ie), 92, pp.&'&)&'%.
Eruse, T., Dark, L., Dark, E., 6uzuki, E., 3'(($5, MDost)Merger .orporate Derformance in JapanN
Maremont, M., MLow 8illette /owed /all 6treet,N Business Week, 6eptem#er $%%2.
Mau#oussin, M.J. and Liler, H., 3$%%@5, MFets Make a -eal,N C*B rontiers of inance.
MBltramar, -iamond 6hamrock agree to merge,N Oil & Gas Journal, 6eptem#er $%%2.
Dillof, 6., and 6antomero, A., 3$%%25, MThe Galue ,ffects of Hank Mergers and AcquisitionsN,
Bank !ergers an% #c+uisitions, 6tern 6chool of Husiness, pp.1%)9@.
6hleifer, A. and 6ummers, F. 3$%%@5, MHreach of Trust in Takeo"ers,N in< Auer#ach, A.,
Corporate ,akeo(ers- Causes an% Conse+uences, Bni"ersity of .hicago Dress, .hap '.
6imon, J., Mokhtari, M. and 6imon, -., 3$%%25, MAre Mergers Heneficial or -etrimentalT
,"idence from Ad"ertising AgenciesN, $nternational Journal of the Economics of
Business, Gol.&, pp.2%)@'.
6irower, Mark, 3$%%95 MThe 6ynergy Trap, N 7ew Sork, *ree Dress.
6udarsanam, 6., Loll, D., 6alami, A., 3$%%25, M6hareholder /ealth 8ains in Mergers< ,ffect of
6ynergy and Awnership 6tructure,N Journal of Business inance & #ccounting, Gol.2,
pp.29&)2%@.
Tsung)Ming, S., and Loshino, S., 3'(((5, MThe ,ffects of Mergers and Acquisitions on
Taiwanese .orporationsN, &e(ie) of Pacific Basin inancial !arkets an% Policies,
Gol. &, pp.$@&)$%%.

1(
PP->DIG
ppendi< 1: Sample Description
#lo$ed Seller &u)er
Deal
Si*e
+,mm-
&u)er
&u$ine$$
De$cri.tion
Tar'et
&u$ine$$
De$cri.tion/
!-F"#-!6C$%&'$( C&'&"*+A,C I-. D&*-"/ 01$('2 C3 18!20.00P4356."* '"("7&*&3- *839* V&5"3 4"-'$( .8$&-
1-A%4-!P$.&:&. T"("*&* G436% S,C C3;;6-&.$'&3-* 16451.!0P437&5"* '"(".3;;6-&.$'&3-* *"47&."* M$-6:$.'64"* .3-*'46.'&3- ;$.8&-"4/
1-A6<-!M.D3--"(( D36<($* C34% ,3"&-< C3 15454.6D"7"(3%*= %4356."* $-5 ;$4>"'* ?"'(&-"4* D"*&<-*= ;$>"* $-5 ;$4>"'* :34 ;3-&'34&-<= %$'&"-'*
2!-S"%-!4,(3.>#6*'"4 E-'"4'$&-;"-' C34% V&$.3; I-. 8400.00 O9-* 5&7"4*&:&"5 "-'"4'$&-;"-' $-5 ;"5&$ #6*&-"**"*D"*&<-*= ;$>"* $-5 *6%%34'* ;&(&'$4/ $&4.4$:' */*'";*
12-@6--!AS R3#3'&.* C34% 3C3; C34% 421.26 S6%%(&"* <(3#$( 5$'$ -"'934>&-< */*'";* R6-* 56B 36'%$'&"-' *64<&.$( ."-'"4*
31-D".-!6D64$."(( I-'"4-$'&3-$( I-. G&(("''" C3 300.00 M$>"* $-5 *"((* $ 7$4&"'/ 3: '3&("'4&"* D"*&<-*= ;$>"* $-5 *"((* .3;%6'"4 */*'";*
23-A%4-!6L34$( C34% L3.>8""5 M$4'&- C34% 000.00 D"7"(3%* %4356.'* :34 $"43*%$." C 5":"-*" &-56*'4&"*P437&5"* 8"$('8 .$4" *"47&."*
30-O.'-!5F&4*' F&-$-.&$( M$-$<";"-' C34%F&4*' D$'$ C34% 6600.00 I-:34;$'&3- %43."**&-< *"47&."*. A&4#34-" 4$5&3 .3;;6-&.$'&3-* "D6&%;"
2-S"%-!T$-5"; C3;%6'"4* I-. C3;%$D C3;%6'"4 C34% 3!84.43 M$>"* 5"*>'3% %"4*3-$( .3;%6'"4* D"7"(3%* $-5 *"47&."* ;$&-:4$;" .3;%6'"4* */*'";*
30-M$/-!R"7.3 DS I-. CVS C34% 28!5.!0 O%"4$'"* $ *'$-5-$(3-" .8$&- 546< .3;%$-/ HMO
22-O.'-!L36&*&$-$ L$-5 C EE%(34$'&3- C3 ,64(&-<'3- R"*364."* I-. 20.8! EE%(34"* :34= 5"7"(3%* $-5 %4356."* 3&( $-5 <$* M$>"* :";&-&-" 8/<&"-" %4356.'*
13-M$4-!6F"5"4$( P$%"4 ,3$45 C3 I-. I-'"4-$'&3-$( P$%"4 C3 200.00 M:<* %6(%+%$%"4#3$45 C %$.>$<&-< M$>"* %$%"4#3$45= %6(%*= (6;#"4= .$4'
2-F"#-!E.>"45 C34% P"--"/ 0@C2 C3 I-. 2364.84 O%"4$'"* $ -$'&3-9&5" .8$&- 3: 5"%$4';"-' *'34"* O%"4$'"* 2=200 546<*'34"*
1-M$/-!5E-S/*'";* I-. R$/'8"3- C3 2214.65 E(".'43-&.*+$&4.4$:' %4356.'*+"-"4</ EE%(34"* :34= 5"7"(3%*= $-5 *"((* 3&(= <$*
18-D".-!6,$((/ E-'"4'$&-;"-' C34% H&('3- H3'"(* C34% 2135.44 O9-* $-5 3%"4$'"* 83'"(* P437&5"* '"(".3;;6-&.$'&3-* *"47&."*
3-D".-!6D&$;3-5 S8$;43.> I-. A('4$;$4 C34% 1!81.03 O&( $-5 <$* 4":&-"4/ O&( $-5 <$* 4":&-"4/
30-@$--!O4N5$ H"$('8C34% T"-"' H"$('8.$4" C34% 1!00.! O%"4$'"* 83*%&'$(* T"("%83-" .3;;6-&.$'&3-*
22-@6(-!T$;#4$-5* I-. P43.'"4 C G$;#(" C3 184.44 M$>"* 5"'"4<"-'= :$#4&. .3-5&'&3-"4* $-5 3'8"4 <335* D"*&<-*= ;$>"* $-5 *"((* 7$(7"* $-5 &-56*'4&$( %4356.'*
26-A6<-!N"((.34 P64&'$- ,"--"'' I-. M$((&-.>435' I-. 1805.05 M$>"* ;"5&.$( %4356.'* $-5 *%".&$('/ .8";&.$(* D"7"(3%* $-5 ;$-6:$.'64"* 5"7&."* :34 7$*.6($4 ;"5&.&-"
23-F"#-!6C345&* C34% @38-*3- C @38-*3- 1800.00 M:<+*"((* #43$5 4$-<" 3: 8"$('8 .$4" %45 F&-$-.&$( %43."**&-< *"47&."*.
1-A6<-!5ALC C3;;6-&.$'&3-* C34% F43-'&"4 C34% 150.00 T"("%83-" .3;;6-&.$'&3-* O%"4$'"* TV C 4$5&3 *'$'&3-*
1-@6--!5C($4> ED6&%;"-' C3 I-. I-<"4*3((-R$-5 C3 1500.00 I-56*'4&$( ;$.8&-"4/ M$>"* 8&<8 %"4:34;$-." $(>$(&-" #$''"4&"*
18-F"#-!FHP I-'"4-$'&3-$( C34% P$.&:&C$4" H"$('8 S/*'";* I-. 146.66 O9-* $-5 3%"4$'"* HMO* O%"4$'"* $ .8$&- 3: 4"'$&( 546< *'34"*
1-M$/-!T"-.34 I-*'46;"-'* KLA I-*'46;"-'* C34% 13!.63 D"*&<-* $-5 *"47&."* '8" *";&.3-56.'34 &-56*'4/ D"*&<-*= ;$>"* $-5 ;$4>"'* '4$-*$.'&3- $6'3;$'&3- */*'";*
2-S"%-!K"/*'3-" I-'"4-$'&3-$( I-. T/.3 I-'"4-$'&3-$( L'5 1361.54 M$>"* 5&*%3*$#(" ;"5&.$( *6%%(&"* O%"4$'"* 83'"(*= .$*&-3* $-5 :&'-"** ."-'"4*
8-O.'-!M6('&.$4" C3* I-. G"-"*&* H"$('8 V"-'64"* I-. 1348.6! P437&5"* *%".&$('/ 8"$('8 .$4" L3-<-'"4; .$4" %437&5"4
1-A6<-!6C3-'&-66; C3 I-. C3;%6'"4 S.&"-."* C34% 1300.5 D"*&<-*= "-<&-""4* $-5 &-'"<4$'"* .3;%6'"4 */*'";* D"7"(3%* 5":"-*" "(".'43-&.* */*'";*
25-@6--!V"4&F3-" I-. H"9("''-P$.>$45 C3 12!0.0! M$-6:$.'64"* "(".'43-&. "D6&%;"-' $-5 *3:'9$4" P437&5"* 36'%$'&"-' %4"*.4&%'&3- 546< %($-*
1-@$--!6S64<&.$( C$4" A::&(&$'"* I-. H"$('8*36'8 C34% 1200.00 P437&5"* ;"5&.$( 4"8$# *"47&."* D"*&<-*= ;$>"*= ;$4>"'* C *"47&."* %43."** *3:'9$4"
12-N37-!6C8"/"--" S3:'9$4" I-. C3;%6'"4 A**3.&$'"* 111!.00 D"*&<-* .3;%6'"4 *3:'9$4" %4356.'* D"*&<-* .3;;6-&.$'&3-* %4356.'* $-5 */*'";*
1$
ppendi< 2: Descriptive Statistics
PRE AVG F
POST'B1
ACFO_DIFF AMRG_DIFF AREV_DIFF EMP_DIFF LVRG_DIFF MKTS_DIFF RELATE
M"$- -0.0058 -0.006835 0.013820 -0.04860 0.01!25! 0.0008 0.400000
M"5&$- -0.01060 0.0043 0.041604 -0.040043 0.021335 0.03!42 0.000000
M$E&;6; 0.103133 0.0!4855 1.68388! 0.56!482 0.200880 0.3044!4 1.000000
M&-&;6; -0.14315 -0.158048 -1.4!055 -0.636266 -0.226430 -0.208!86 0.000000
S'5. D"7. 0.0614!! 0.06485 0.6683 0.238555 0.0!4!1 0.113614 0.4!823
S>"9-"** -0.044380 -0.51354 -0.231564 0.1360 -0.4020!1 0.243 0.408248
K64'3*&* 2.3221! 2.806346 4.80!46 4.62158 3.2!10 3.130266 1.16666
@$4D6"-,"4$ 0.584150 1.6!104 4.353!46 3.403084 0.!04!28 0.3!8613 5.03422
P43#$#&(&'/ 0.4613 0.431!04 0.113384 0.182402 0.63605! 0.81!2!! 0.08062
O#*"47$'&3-* 30 30 30 30 30 30 30
PRE AVG F
POST'B2
ACFODIFF2 AMRGDIFF
2
AREVDIFF2 EMPDIFF2 LVRGEDIFF
2
MKTSDIFF
2
RELATE
M"$- -0.02831 -0.01500 0.028261 -0.13136 -0.008250 0.054818 0.400000
M"5&$- -0.00!!83 0.00218! -0.028408 -0.00!25 0.00!63 0.041!8 0.000000
M$E&;6; 0.18024 0.16!33 1.414621 0.86630 0.22!0!! 0.42480! 1.000000
M&-&;6; -0.260505 -0.1!5804 -0.!24504 -0.880134 -0.616803 -0.22!50 0.000000
S'5. D"7. 0.080!1 0.0!1318 0.45442 0.352458 0.166652 0.15088 0.4!823
S>"9-"** -0.3!468 -0.332!36 0.!4325 0.286!5 -1.6!432 0.1!8!1 0.408248
K64'3*&* 3.822232 2.46482 4.6185 4.00514 .15418 3.312565 1.16666
@$4D6"-,"4$ 1.565060 0.!12245 .!4224 1.65582 35.!5!63 0.31!!61 5.03422
P43#$#&(&'/ 0.45248 0.63336 0.018852 0.432665 0.000000 0.852161 0.08062
O#*"47$'&3-* 30 30 30 30 30 30 30
PRE AVG F
POST'B3
ACFODIFF
3
AMRGDIFF3 AREVDIFF3 EMPDIFF3 LVRGDIFF3 MKTSDIFF3 RELATE
M"$- -0.0286! -0.002288 -0.05028 -0.06035 0.283!83 0.0515 0.400000
M"5&$- -0.03658 0.00531! -0.085! -0.036500 0.3533 0.041064 0.000000
M$E&;6; 0.16244 0.2004!4 1.15613! 0.!54102 1.010462 0.415383 1.000000
M&-&;6; -0.1200! -0.1!088 -2.4!04! -0.!86561 -0.2626 -0.25!54 0.000000
S'5. D"7. 0.084001 0.102342 0.5!!183 0.36630 0.3101!3 0.16614 0.4!823
S>"9-"** 0.22526 -0.0882 -1.!6!86 -0.2883 -0.00182 0.13805 0.408248
K64'3*&* 2.4!05!6 2.4104 10.8256 4.80!283 2.52384 2.!445! 1.16666
@$4D6"-,"4$ 0.5!126 0.464116 !2.6!24 4.5082! 0.283388 0.0!!164 5.03422
P43#$#&(&'/ 0.485!1 0.!2!00 0.000000 0.104!40 0.8688 0.!5162 0.08062
O#*"47$'&3-* 30 30 30 30 30 30 30
RELATED ACFO_DIFF AMRG_DIFF AREV_DIFF EMP_DIFF LVRG_DIFF MKTS_DIFF
1'
MERGERS
M"$- 0.006328 0.00208 0.0!26 -0.0653!4 0.024521 0.03622!
M"5&$- 0.005118 0.012656 -0.03165 -0.083685 0.041!6 0.01!0
M$E&;6; 0.103133 0.0!4855 1.68388! 0.4!0165 0.200880 0.18!62
M&-&;6; -0.0!!1!6 -0.158048 -1.55!146 -0.520854 -0.226430 -0.208!86
S'5. D"7. 0.064286 0.0662!4 0.!418 0.24153 0.121628 0.0!8688
S>"9-"** -0.131303 -0.!02013 0.004806 0.434240 -0.638404 -0.860664
K64'3*&* 1.!!6821 3.8252! 3.3505!2 3.600550 2.!545 4.200520
@$4D6"-,"4$ 0.58240 2.13180 0.06662! 0.603!13 0.!0524! 2.38561
P43#$#&(&'/ 0.4340 0.344421 0.!6234 0.3!30 0.635!5 0.303368
O#*"47$'&3-* 13 13 13 13 13 13
CONGLOMERATE
MERGERS
ACFO_DIFF AMRG_DIFF AREV_DIFF EMP_DIFF LVRG_DIFF MKTS_DIFF
M"$- -0.018531 -0.00!2! -0.050343 -0.0350 0.015235 0.0!5!62
M"5&$- -0.016350 -0.01453! 0.0512! 0.01232 0.012!!3 0.0440!5
M$E&;6; 0.0883 0.08243 1.2135!4 0.56!482 0.14!486 0.3044!4
M&-&;6; -0.14315 -0.14466 -1.4!055 -0.636266 -0.103!0 -0.048612
S'5. D"7. 0.058!16 0.0615!! 0.5130 0.2385!8 0.0203 0.120203
S>"9-"** -0.065605 -0.48!565 -1.002084 -0.0!855 0.28214 0.562010
K64'3*&* 2.583142 2.6!1055 6.80645! 5.640353 2.324342 1.8205
@$4D6"-,"4$ 0.135282 0.46684 13.1082! 4.!65642 0.548!16 1.!52310
P43#$#&(&'/ 0.!345!6 0.688430 0.001424 0.08350 0.5!!84 0.365
O#*"47$'&3-* 1 1 1 1 1 1
SACCESSFAL ACFO_DIF
F
AMRG_DIFF AREV_DIFF EMP_DIFF LVRG_DIFF MKTS_DIFF RELATE
M"$- 0.050158 0.0432!8 0.325!42 -0.068615 0.021533 0.048865 0.538462
M"5&$- 0.0543 0.030!4 0.143861 -0.0666!1 0.01!18 0.01!0 1.000000
M$E&;6; 0.103133 0.0!4855 1.68388! 0.56!482 0.1205! 0.20!1 1.000000
M&-&;6; 0.005118 -0.014680 -0.4380 -0.520854 -0.160!45 -0.208!86 0.000000
S'5. D"7. 0.031055 0.033863 0.606325 0.25053 0.0!6833 0.113148 0.51885
S>"9-"** 0.224682 0.015663 0.!!0432 0.80!!14 -0.264160 -0.1!!! -0.154303
K64'3*&* 1.!81584 1.54552 3.108411 4.!18803 2.2!4014 4.026063 1.023810
@$4D6"-,"4$ 0.611! 0.84033 2.1316! 3.415561 0.42116 0.640454 2.166!4
P43#$#&(&'/ 0.14!1 0.656806 0.344423 0.181268 0.810112 0.25!84 0.338413
O#*"47$'&3-* 13 13 13 13 13 13 13
ANSACCESSFAL ACFO_DIF
F
AMRG_DIFF AREV_DIFF EMP_DIFF LVRG_DIFF MKTS_DIFF RELATE
M"$- -0.05204 -0.04512 -0.224861 -0.03330 0.0151! 0.0862!! 0.352!41
M"5&$- -0.04414! -0.0345!4 -0.13!8! 0.014424 0.022!52 0.065642 0.000000
M$E&;6; -0.00526 0.03!52 0.858818 0.4!0165 0.200880 0.3044!4 1.000000
M&-&;6; -0.14315 -0.158048 -1.4!055 -0.636266 -0.226430 -0.048612 0.000000
S'5. D"7. 0.036364 0.056256 0.62868 0.23554 0.0!6382 0.11466! 0.4!25!2
S>"9-"** -0.830!01 -0.4!!823 -1.111442 -0.440!24 -0.505!03 0.601! 0.61545
K64'3*&* 3.3!311 2.532323 4.301314 4.34504 3.!!308 2.00!!4 1.3888
@$4D6"-,"4$ 2.06558! 0.8625! 4.6!!534 2.681865 1.42!683 1.6338 2.!34!65
P43#$#&(&'/ 0.356011 0.64!612 0.0!53!1 0.261602 0.48!20 0.44100 0.230505
O#*"47$'&3-* 1 1 1 1 1 1 1
ppendi< $: Correlation Matri<
1&
ACFO_DIFF AMRG_DIFF AREV_DIFF EMP_DIFF LVRG_DIFF MKTS_DIFF
ACFO_DIFF 1.0000 0.1285 0.4188 -0.3!!5 -0.14! -0.0553
AMRG_DIFF 0.1285 1.0000 -0.081 0.0!44 0.0303 0.24!0
AREV_DIFF 0.4188 -0.081 1.0000 0.4833 0.240! 0.2885
EMP_DIFF -0.3!!5 0.0!44 0.4833 1.0000 0.2!01 0.1856
LVRG_DIFF -0.14! 0.0303 0.240! 0.2!01 1.0000 0.6285
MKTS_DIFF -0.0553 0.24!0 0.2885 0.1856 0.6285 1.0000
ACFO_DIFF AMRG_DIFF AREV_DIFF EMP_DIFF LVRG_DIFF MKTS_DIFF
ACFO_DIFF 1.0000 0.4!0 0.6114 0.356! 0.1450 0.13
AMRG_DIFF 0.4!0 1.0000 0.403 0.3115 0.1302 0.0!14
AREV_DIFF 0.6114 0.403 1.0000 0.111 0.0288 0.021!
EMP_DIFF 0.356! 0.3115 0.111 1.0000 -0.3260 -0.048
LVRG_DIFF 0.1450 0.1302 0.0288 -0.3260 1.0000 0.2306
MKTS_DIFF 0.13 0.0!14 0.021! -0.048 0.2306 1.0000
ACFO_DIFF AMRG_DIFF AREV_DIFF EMP_DIFF LVRG_DIFF MKTS_DIFF RELATE
ACFO_DIFF 1.0000 0.182! 0.65 -0.3044 0.0832 0.1656 0.3654
AMRG_DIFF 0.182! 1.0000 -0.4338 -0.335 -0.0050 -0.1!56 0.2158
AREV_DIFF 0.65 -0.4338 1.0000 0.1681 -0.1860 0.081 0.0361
EMP_DIFF -0.3044 -0.335 0.1681 1.0000 -0.3656 -0.208 -0.4063
LVRG_DIFF 0.0832 -0.0050 -0.1860 -0.3656 1.0000 0.6136 -0.25!3
MKTS_DIFF 0.1656 -0.1!56 0.081 -0.208 0.6136 1.0000 -0.145!
RELATE 0.3654 0.2158 0.0361 -0.4063 -0.25!3 -0.145! 1.0000
ppendi< (: /egression /esults
-!uation: (.@.1
ACFO_DIFF AMRG_DIFF AREV_DIFF EMP_DIFF LVRG_DIFF MKTS_DIFF RELATE
ACFO_DIFF 1.0000 0.686 0.5142 -0.0031 -0.0138 0.0022 0.2385
AMRG_DIFF 0.686 1.0000 0.145! -0.1336 0.0880 -0.0330 0.0141
AREV_DIFF 0.5142 0.145! 1.0000 0.2!1! 0.166 0.1046 0.1843
EMP_DIFF -0.0031 -0.1336 0.2!1! 1.0000 0.01! 0.0420 -0.0510
LVRG_DIFF -0.0138 0.0880 0.166 0.01! 1.0000 0.386 0.1006
MKTS_DIFF 0.0022 -0.0330 0.1046 0.0420 0.386 1.0000 0.011
RELATE 0.2385 0.0141 0.1843 -0.0510 0.1006 0.011 1.0000
ACFO_DIFF AMRG_DIFF AREV_DIFF EMP_DIFF LVRG_DIFF MKTS_DIFF RELATE
ACFO_DIFF 1.0000 0.321 0.1368 0.3!18 -0.14!0 0.3245 0.0505
AMRG_DIFF 0.321 1.0000 -0.1210 -0.0122 0.1532 0.2551 -0.1481
AREV_DIFF 0.1368 -0.1210 1.0000 0.5011 0.4366 0.231 0.0886
EMP_DIFF 0.3!18 -0.0122 0.5011 1.0000 0.3315 0.2182 0.1844
LVRG_DIFF -0.14!0 0.1532 0.4366 0.3315 1.0000 0.21!6 0.1430
MKTS_DIFF 0.3245 0.2551 0.231 0.2182 0.21!6 1.0000 -0.104
RELATE 0.0505 -0.1481 0.0886 0.1844 0.1430 -0.104 1.0000
10
D"%"-5"-' V$4&$#("G ACFO_DIFF
M"'835G L"$*' SD6$4"*
S$;%("G 1 30
I-.(65"5 3#*"47$'&3-*G 30
V$4&$#(" C3"::&.&"-' S'5. E4434 '-S'$'&*'&. P43#.
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-!uation: (.@.2
D"%"-5"-' V$4&$#("G AMRG_DIFF
M"'835G L"$*' SD6$4"*
S$;%("G 1 30
I-.(65"5 3#*"47$'&3-*G 30
V$4&$#(" C3"::&.&"-' S'5. E4434 '-S'$'&*'&. P43#.
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D"%"-5"-' V$4&$#("G ACFODIFF
M"'835G L"$*' SD6$4"*
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11
I-.(65"5 3#*"47$'&3-*G 30
V$4&$#(" C3"::&.&"-' S'5. E4434 '-S'$'&*'&. P43#.
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D"%"-5"-' V$4&$#("G ACFODIFF
M"'835G L"$*' SD6$4"*
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I-.(65"5 3#*"47$'&3-*G 30
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-!uation (.:.$
D"%"-5"-' V$4&$#("G ACFODIFF
M"'835G L"$*' SD6$4"*
S$;%("G 1 30
I-.(65"5 3#*"47$'&3-*G 30
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V$4&$#(" C3"::&.&"-' S'5. E4434 '-S'$'&*'&. P43#.
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-!uation (.E.1
D"%"-5"-' V$4&$#("G ACFO_DIFF
M"'835G L"$*' SD6$4"*
S$;%("G 1 13
I-.(65"5 3#*"47$'&3-*G 13
V$4&$#(" C3"::&.&"-' S'5. E4434 '-S'$'&*'&. P43#.
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-!uation (.E.2
D"%"-5"-' V$4&$#("G ACFO_DIFF
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S$;%("G 1 1
I-.(65"5 3#*"47$'&3-*G 1
V$4&$#(" C3"::&.&"-' S'5. E4434 '-S'$'&*'&. P43#.
19
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-!uation (.C.1
D"%"-5"-' V$4&$#("G ACFO_DIFF
M"'835G L"$*' SD6$4"*
S$;%("G 1 13
I-.(65"5 3#*"47$'&3-*G 13
V$4&$#(" C3"::&.&"-' S'5. E4434 '-S'$'&*'&. P43#.
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-!uation (.C.2
D"%"-5"-' V$4&$#("G ACFO_DIFF
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I-.(65"5 3#*"47$'&3-*G 1
V$4&$#(" C3"::&.&"-' S'5. E4434 '-S'$'&*'&. P43#.
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1@
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