Do Mergers and Acquisitions Create Shareholder Value

Do Mergers and Acquisitions Create Shareholder Wealth In The Pharmaceutical Industry?
Mahmud Hassan, Dilip K. Patro, Howard Tuckman and Xiaoli Wang*
Purpose: This paper analyzes mergers and acquisitions (M&A) focusing on the U.S. pharmaceutical industry in the period 1981-2004. This industry is chosen because it is global, engages intensively in M&A which it uses to both complement and substitute for early stage research, and because the potential abnormal returns to blockbuster drugs are substantial. It is our assumption that if abnormal returns to M&A exist in the short and long run, this is the industry to find them.
Design: Our study examines short term abnormal returns separating mergers from acquisitions and US-based from foreign-based M&A targets. We examined 405 mergers and acquisitions during 1981-2004 to address the issues of our research.
Findings: Evidence of short and long term abnormal returns, as well as accounting and efficiency effects are found for acquisitions but not for mergers, however, our tests do suggest that mergers with US-based targets are not value destroying. We also find differences as to the effects of acquisitions of foreign-based, as opposed to US-based targets.
Value: Taken in total our results provide support for the view that, at least in the pharmaceutical industry, acquisitions of US-based companies have a positive impact on wealth creation for company shareholders.
Key Words: Pharmaceutical, M&A, Stock Performance
Category: Research Paper

1. Introduction Whether acquiring company shareholders experience a wealth effect from mergers and acquisitions is a matter of ongoing debate among academic researchers[[i]]. Some argue that mergers and acquisitions (M&A) create synergies that benefit both the acquiring company and the consumers (e.g., Weston, Mitchell and Mulherin, 2004). Others argue that M&A activities create agency problems, resulting in less than optimal returns (e.g., Jensen, 1986).

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