Do Acquisitions Drive Performance or Does Performance Drive Acquisitions?

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Abstract
We examine the characteristics, strategies, and performance of acquirers in 12,476 completed US acquisitions. We document that a portfolio of acquiring firms significantly outperformed market benchmarks during the 1990s, and that frequent acquirers outperformed infrequent acquirers. This outperformance reflects superior stock price performance that occurs before, not after, acquisition announcements, implying that it is good performance that begets acquisitions rather than the reverse. In addition to this pre-acquisition stock price run-up, in the vast majority of cases, we observe a statistically and economically significant positive market reaction to the acquisition announcement itself. Further, we find that acquirer size is not the most important determinant of the market reaction to an acquisition announcement. Instead, the target organizational form – i.e., whether the target is public or non-public – dominates all else. In addition, the size of the target and the medium of exchange are at least as important as acquirer size. Our empirical results lead us to conclude that the widely accepted attributions of “hubris” and “agency costs” to the motivations of the managers of acquiring firms are perhaps overstated, since they apply only to a small subset of cases where the target is relatively large and publicly traded, and stock is used as the sole medium of exchange. A substantial portion of M&A activity is consistent with shareholder value-maximizing behavior.

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