Target efficiency: premiums, acquirer returns and performance in UK manufacturing mergers

Despite the prevalence of mergers as a strategic growth mechanism, many transactions fail to deliver anticipated benefits. This thesis examines the role of target firm efficiency in merger outcomes within the UK manufacturing sector, addressing a critical gap in understanding the factors that contribute to M&A success and failure. The study employs a comprehensive multi-method approach combining data envelopment analysis, event study methodology, regression discontinuity design, propensity score matching, and difference-in-differences analysis. This methodological framework enables detailed investigation of efficiency's impact on M&A outcomes using quantitative data from 89 UK manufacturing sector mergers between 2009 and 2021, focusing on acquirer shareholder returns, merger premiums, and post-merger financial performance.

The findings reveal a nuanced and often counterintuitive relationship between target efficiency and M&A outcomes. A non-linear relationship between target efficiency and acquirer cumulative abnormal returns (CARs) is observed, characterized by an efficiency frontier effect where benefits diminish beyond an optimal threshold. Surprisingly, acquirers paid lower premiums for highly efficient targets, challenging conventional assumptions about efficiency valuation in M&A. The study finds that target experience and industry relatedness positively moderate the efficiency-return relationship, underscoring the importance of contextual factors in M&A success. Post-merger performance analysis yields mixed results, with improvements in certain financial metrics like profit margins and debtors' turnover, but negative impacts on fixed asset turnover and Tobin's Q for acquirers of efficient targets. These findings highlight the complexities of integrating and leveraging efficient targets' resources, suggesting that different efficiency-related practices may have varying degrees of transferability and value creation potential in M&A contexts.

By empirically demonstrating the multifaceted links between efficiency and acquirer shareholder value, merger premiums, and post-acquisition performance, this thesis makes essential theoretical contributions to the resource-based view, dynamic capabilities theory, and efficiency theories in strategic management. It challenges simplistic notions of efficiency in M&A and highlights the need for more nuanced approaches to target selection, valuation, and post-merger integration. The findings have significant implications for M&A practitioners, corporate strategists, and policymakers, emphasizing the importance of considering multiple, interrelated factors when assessing the potential of M&A transactions and designing integration strategies.