The Profitability of Corporate Mergers

Notwithstanding the widespread interest in the profitability of mergers, very little evidence on the success of corporate mergers has been offered.' Furthermore, what evidence has been presented has generally been conflicting. For example, of two recent studies, one concluded that actively merging firms were noticeably unprofitable2 and the other suggested that active acquirers were neither more nor less profitable than other other comparable firms in their industry.3 These conflicting findings have historical precedent. At least three authors studied the profitability of firms which were actively involved in the merger movement occurring at the turn of the century. Of these three, one found that such firms were singularly unprofitable after consolidation,4 another concluded that approximately one half of the combinations formed eventually achieved success,5 and the third found that the common stock of some consolidations yielded a return no better than that obtained from ordinary preferred stocks and bonds.6 This study attempts to pinpoint some of the sources of these conflicting findings by comparing the investment performance7 and earnings per share growth of active acquirers to that of their respective industries.