Value of the acquiring company and the success of M&A transaction in the automotive sector

Abstract

PURPOSE: The aim of this paper is to analyze the relationship between the value of the acquiring company and the success of the M&A transaction. The success of the transaction is measured in terms of stock returns in mid-term. We use the sample consisting of 764 M&A transactions conducted globally in the automotive sector by listed companies over the period 2000-2018. The M&A transactions were identified using Thomson Reuters Eikon database.

DESIGN/METHODOLOGY/APPROACH: We compared a number of indicators relating to the market valuation of a company pursuing an acquisition or merger at the time of finalizing the deal with a profitability indicator. The success or the failure of the transaction we measure in terms of stock returns in mid-term. Using the significance of differences test, the MannWhitney test, a comparative analysis was conducted between the company's valuation at the time of the merger or acquisition transaction and its valuation one year later.

FINDINGS: The study findings show that about 50% of the transactions conducted in the automotive industry over the period 2000-2018 were successful for the acquiring company. The analysis of the value ratios for the sample shows that only the values of four ratios: P/S, EV/S, EV/EBITDA, EV/CFO, differ significantly between the companies in which M&A have been successful and those in which the effect has been defined as a failure.

PRACTICAL IMPLICATIONS: The results obtained may prove useful to investors associated with companies making or planning to make an acquisition of another entity. In addition, the conclusions may provide guidance to managers who are considering a merger or acquisition.

ORIGINALITY/VALUE: Our study contributes to the existing literature in several ways. First the study examines the M&A transactions in under-researched sector – the automotive sector undertaken globally. Second, we use the data of the global conducted transactions. Third, we evaluate the post-merger value of the acquiring companies using different ratios.