This chapter contributes to the literature on M&A performance by examining the impact of M&A deals on company value over the long-run in developed and emerging economies. Examining a sample of 153 and 125 deals from Western European and emerging capital markets respectively, 2002-2013, and employing economic profit as a performance measure,we find that transactions in developed markets create more value for shareholders than M&As in emerging economies over the two-year period surrounding the deals. After adjustments for industry trends, economic profit significantly decreases for firms in emerging capital markets, taking negative values, while for companies in developed markets we observe insignificant improvements in economic profit values following acquisitions. These results indicate that companies in emerging capital markets cannot achieve the planned synergies, integrate successfully and improve the performance of the combined firms. We find that industry and geographical diversification influence the performance of M&A deals in emerging and developed countries respectively. We also find that the effects on company value differ for stock and cash deals, and for high- and low-tech transactions in both markets. Testing the impact of economic crisis of 2007-2008 on the performance of M&A deals we reveal that the adjusted economic profit does not differ significantly between pre- and post-crisis M&As.
During the last two decades corporate international diversification became a widely used growth strategy. However, the majority of scientific researches insist on its value-destroying pattern. Those of them which were based on accounting studies’ methodology and used current performance measures are likely to make an incomplete evaluation of corporate performance by accounting either for operating performance or financial (cost of capital) effects of internationalization. The current paper proposes a new approach for estimation of internalization-performance relationship which is based on economic profit concept. It allows to control simultaneously both operating and financial effects of internationalization on the firms’ current performance. The proposed model has been empirically tested on a sample of large companies from one of emerging economies - Russia. The results identify a non-linear U-shape relationship between a degree of internationalization and companies’ residual income (economic profit). The relationship is mainly determined by operating performance effects on economic profit while cost of capital has a modest effect. Overall for the majority of companies international diversification refers to decrease in economic profit. The results are compared against the Q-Tobin measure which incorporates expectations about future performance. A joint analysis of current performance (economic profit) and long-term performance (Q-Tobin) allows to expect the internationalization benefits to be realized in future. As an implication of the present research for corporate decision makers it may be stated that at the initial level of international diversification the internationalization decisions should be made with a high degree of caution. There should be a clear internationalization strategy based on definite mechanisms of performance improvement. The prestige and other irrational motives which may lead to the value destruction should be pruned.
The level of corporate diversification is one of the most important decisions that management makes. The diversification strategy has its benefits and costs. According to the principles of corporate finance the efficiency of diversification strategy is always assessed by its impact on shareholder value. The article discusses the main value-creating and value-destroying drivers of diversified firms.