Examining investors’ responses to announcements of mergers and acquisitions (M&As) and joint ventures—responses both at the time of the announcement and over the longer term—the authors find that M&As outperform joint ventures immediately but that joint ventures outperform in the long run.
Drawing on an extensive history of mergers and acquisitions (M&As) and joint ventures for both technology and nontechnology firms, the authors evaluate market reactions to firm announcements of such transactions. Their research reveals that immediately following the announcements, M&As outperform joint ventures but that, over time, the reverse holds.
How Is This Research Useful to Practitioners?
Considering an extensive number of transactions subject to rigorous vetting, the authors study the financial performance of M&As and joint ventures. They consider whether firm performance immediately after the announcement can be used as an accurate gauge of longer-term performance. To this end, the authors develop several hypotheses to which they subject the firms under consideration on both a short- and a long-term basis.
Robust parsing and analysis of the data reveal that M&As, driven more by IT firms than by non-IT firms, lead to what turns out to be fleeting superior performance in the short term relative to joint ventures. Markets over the longer term judge firms experiencing M&As less able to digest and realize the benefits of joint research and development efforts compared with firms experiencing joint ventures. Interestingly, the better performance of joint ventures over the long term is driven by non-IT firms.
Sell-side analysts who cover firms in the secondary market as well as investment bankers involved in the underwriting process will find this study valuable. So, too, will portfolio managers who draw on such inputs for asset allocation decisions.
How Did the Authors Conduct This Research?
The authors expand on the existing literature on firm tie-ups. They consider an extensive sample of transactions from January 1995 to December 2003 and use LexisNexis Academic and Factiva databases for articles in newswires and press releases, aggregate news sources, and newspapers. The final sample consists of 115 joint ventures and 133 M&As, broken out further into 44 joint ventures and 88 M&As of IT firms and 71 joint ventures and 45 M&As of non-IT firms.
Accounting data from the Compustat annual database is the source of performance information. Return on assets, operating return on assets, operating cash flow return on assets, and Tobin’s q are the performance metrics that the authors use. They also consider qualitative drivers of performance present or absent at the time of the announcement—for example, a management shake-up or industry pressure to merge. Factor-based regressions using data for both M&As and joint ventures over the short and long term help affirm or refute performance results from the transactions. Finally, the authors use robustness tests for both time frames to test the validity of their findings.
They evaluate performance both at the time of the M&A or joint venture announcement and over a longer (three-year) period after the announcement. The shorter-term market perception of M&As accords them greater value for the perceived benefit of a more intense research and development effort that would ensue from the merger. The longer-term view—that such transactions leave firms incapable of incorporating new research and development effectively—is less sanguine. The results for joint ventures are the opposite of those for M&As in both time frames.
Firm valuation is a nuanced process. How a firm performs over time is a function of its financial viability and ability to establish itself in a competitive marketplace but also derives from investor perception. The authors have contributed importantly to an ongoing debate in an area of research that continues to evolve. Practitioners would do well to consider the implications.