MARKET REACTION TO A COMPANY ACQUIRING ANOTHER COMPANY

Market Reaction to a Company Acquiring another Company

Acquisition

Firms that are quoted on the markets of Western industrialized economies undertake hundreds of acquisitions every year. Sometimes, however, these hundreds rapidly grow into thousands. Curiously, the lion's share of these acquisitions—depending on the industry, roughly between 65% and 85%—repeatedly fail to create shareholder value. This is the so-called “acquisition paradox”: If most of these acquisitions fail, why then do they at times remain so popular? (Dickerson, 2003, 337-357 )

A large part of this chapter will be devoted to answering this question. We will discuss several theories of the firm such as theories that try to establish the drivers of firm behavior—in which executives play a dominant role—in order to see whether they can account for systematically thick acquisitions. We will subsequently discuss the possible effects of such acquisitions both on the firms concerned and on the economy as a whole. We will conclude with a discussion of management and policy implications of the acquisition paradox both at the level of business executives and public policymakers, including policies to prevent the paradox from manifesting itself again in the future. First, however, we will have to consider the stylized facts of acquisition performance at some length as this is so neglected in the management literature that newcomers to the field find it difficult to accept that a majority of (acquisition-active) firms appear to violate the assumptions of Economics 101.( Dickerson, 1997, . 344-361)

Finding adequate answers to the acquisition paradox is important for several reasons. First, explaining firm behavior that is not economically rational yet common must have implications for received theories of the firm. Second, understanding the determinants of acquisition failure is helpful in developing effective corporate strategies in daily business practice. Third, since acquisition failure not only appears to express itself in terms of profits or innovation but also in terms of shareholder value, understanding acquisition dynamics is also helpful to investors. Finally, since acquisition failure at times is so widespread, understanding its causes is helpful for public policymakers, too. Thus, the entry provides practical information to executives in various branches of the economy: firm managers and fund managers as well as public managers. (Dewey, 1996, 395-400 )

Given this importance, it is rather noteworthy that most acquisition research has focussed on prescriptive rather than explanatory issues. That is, it has focused on how to improve ...