The effect of corporate acquisitions on operating performance of Malaysian companies

Abstract

Recent research observed in a number of countries with developed capital markets, including the US and the UK, have produced inconclusive evidence on the presence of gains to acquiring company shareholders and indeed to the existing of net wealth gains. Thus, the current study aims to contribute to the debate on takeover activity by examining whether operational gains arise, using operating cash flow to measure operating performance of Malaysian companies involved in takeover activity between the period 1988-1992. Rather than investigating the distribution of shareholder wealth changes, however, the focus is whether takeover in Malaysia lead to an improvement in corporate performance. Consistent with the characteristics of private acquisitions in the sample of 97 quoted acquiring and 117 target companies (comprising of 113 private, 3 public listed and 1 non-public listed), acquisitions in Malaysia appear to be non-disciplinary. Despite the non-disciplinary motives, the overall results reported in the current study suggest that acquisitions in Malaysia during the period 1988-1992 lead to operating cash flow improvements in the long run. The improvement in performance results from both increases in return on sales (operating cash flow per dollar of sales) and in asset turnover (sales per dollar of assets). These improvements are not achieved at the expense of the long-term viability of the combined firms nor does it appear to be driven by cost-cutting strategies. In addition, empirical evidence in the thesis indicates that the major source of operating gains is the acquisition of companies with a high overlap of product market relatedness. In addition acquisitions that are financed by equity produce higher operating gains. Acquirers who make no immediate change to the management team of the target company following the acquisition also achieve a greater increase in post acquisition performance, reinforcing the likelihood that this sample does not consist of disciplinary acquisitions. Further, the significant positive correlation between the share price market revaluation of acquiring firms around the bid period, the change in post acquisition operating performance and the premium paid for the target indicate that managers who anticipate post acquisition operating cash flow improvements will pay a premium to acquire the targets. The findings can also be viewed as evidence that cash flow data and market value data can capture real economic phenomena which explain a substantial proportion of the market's reaction to takeovers around the announcement period. The results demonstrate that Malaysian acquisitions do lead to improvements in operating performance that provide potential for benefits to both the economy as a whole and bidding company shareholders. However, as the majority of target companies in the current study were previously privately owned businesses, researchers and policy makers should be wary before generalising from these results.