MASSACHUSETTS INSTITUTE OF TECHNOLOGY 50 MEMORIAL DRIVE CAMBRIDGE, MASSACHUSETTS 02139
DOES CORPORATE PERFORMANCE IMPROVE AFTER MERGERS?
by
Paul M. Healy MIT's Sloan School of Management
Krishna G. Palepu Harvard Business School
and
Richard S. Ruback Harvard Business School
Working Paper
^t'Bl'tS-SO
April 1990
We
thank Robin Cooper, George Foster, Michael Jensen, Bob Kaplan, Richard Leftwich, Mark Wolfson, Karen Wruck, and seminar participants at Baruch College, Carnegie Mellon, Columbia, Dartmouth, Duke, Federal Reserve Bank OVashington D.C.), Harvard, Michigan, MIT, NYU, Rochester, Stanford, USC, and U.S. Department of Justice for helpful conmients on earlier drafts, Chris Fox and Ken Hao for research assistance, and the International Financial Services Center at MIT and the Division of Research at HBS for financial support.
DOES CORPORATE PERFORMANCE IMPROVE AFTER MERGERS?
Abstract
We examine the post-acquisition operating performance of merged firms using a sample of the 50
between U.S. public industrial firms completed in the period 1979 to 1983. The merged firms have significant improvements in asset productivity relative to their industries after the merger, leading to higher post-merger operating cash flow returns. Sample firms maintain their capital expenditure and R&D rates relative to their industries after the merger, indicating that merged firms do not reduce their long-term investments. There is a strong positive relation between post-merger increases in operating cash flows and abnormal stock returns at merger announcements, indicating that expectations of economic improvements underlie the equity revaluations of the merging firms.
largest mergers
results indicate that
DOES CORPORATE PERFORMANCE IMPROVE AFTER MERGERS?
1.
Introduction
This study examines the post-merger cash flow performance of acquiring and target firms,
and explores
the sources of merger-induced
inability
changes
in
cash flow performance. Our research
is
motivated by the
real
of stock price performance studies to determine whether takeovers create
economic gains and
to identify their sources.
There
is
near unanimous agreement that target stockholders benefit from mergers, as
evidenced by the premium they receive for selling their shares.
The
stock price studies of
takeovers also indicate that bidders generally break-even, and that the combined equity value of the
bidding and target firms increase as a result of takeovers.
typically attributed to
These increases
in equity
values are
some unmeasured source of
real
economic
gains, such as synergy. But the
equity value gains could also be due to capital market inefficiencies. For example, the equity value
gains
may simply
arise
from
the creation of an over-valued security.
Previous studies have analyzed the stock price performance of unsuccessful takeovers to
determine
if
the equity increases in takeovers are
from
real
economic gains or
capital
market
inefficiencies.!
However, the studies of unsuccessful takeovers cannot distinguish between the
inefficiency explanations.
is
real
economic gains and the market
The
fact that the stock prices of
unsuccessful merger targets return to their pre-offer level
anticipated
consistent with the loss of an
is
premium — whatever
its
source.
The
It is,
anticipation of real economic gains
observationally equivalent to market mispricing.
therefore, difficult to conceive of a pure
stock price study that could resolve the ambiguity in the interpretation of the stock price evidence
because of
this inherent identification
problem.
Stock price studies also cannot provide evidence on the sources of any merger-related
1
Dodd
(1980), Asquith (1983).
Dodd and Ruback
(1977), Bradley, Desai and
Kim
(1983), and
Ruback
(1988).
Post-merger corporate performance
gains.
page 2
Yet, differences of opinion about the source of the gains in takeovers underlies
much of
the public policy debate
on
their desirability.
Gains from mergers could arise from a variety of
sources, such as operating synergies, tax savings, transfers
stakeholders, or increased
from employees or other
monopoly
rents.
Equity gains from only
some of
these sources are
unequivocally beneficial at the social
level.
Our approach
is to
use post-merger accounting data to directly test for changes in
operating performance that result from mergers. 2
Our
tests
use accounting data collected from
for
company annual
large mergers
reports,
merger prospectuses, proxy statements and analysts' reports
industrial firms
50
between U.S. public
which were completed
in the
period 1979 to
1983.
We recognize
that accounting data are imperfect
measures of economic performance and
that these data
can be affected by managerial decisions. As
we
explain in section 2,
we
use cash
flow measures of economic performance to mitigate the impact of the financing of the acquisition
and the method of accounting for the transaction.
We also recognize that our cash
flow variables
measure period-by-period performance which
is
affected by firm-specific and industry factors.
We therefore use industry performance as a benchmark to evaluate post-merger performance.
Results reported in Section 3
show
that the
merged firms have increases
in
post-merger
operating cash flow performance relative to their industries. These increases arise from post-
merger improvements
in asset productivity.
We find no evidence
that the
improvement
in post-
merger cash flows
is
achieved
at the
expense of the merged firms' long-term viability since the
sample firms maintain their capital expenditure and
results differ
R&D rates relative to their industries.
Our
from the findings reported by Ravenscraft and Scherer (1987), and Herman and
Lowenstein (1988)
who examine
earnings performance after takeovers and conclude that merged
2
Three recent studies have examined earnings performance subsequent to management buyouts of
corporations (Bull (1988), Kaplan (1990), and Smith (1990)). Our paper focuses on acquisitions of one public company by another either in a merger or a tender offer, rather than on management buyouts.
3
Post-merger corporate performance
firms have no post-takeover operating improvements.
page 3
In section 4
we examine
the relation between our cash flow
in earlier studies.
measures of post-merger
in operating cash
performance and stock market measures used
Improvements
flow returns
in part
explain the increase in equity values of the merging firms at the
indicates that the stock price reaction to mergers
is
announcement of the merger. This
anticipated
driven by
economic gains
after the merger.
2.
Experimental Design
2.1
Sample
We
limit the
base our analysis on the largest 50 acquisitions during the period 1979 to 1983.
studied to
We
number of acquisitions
make
the
hand data collection tasks manageable. The
largest acquisitions have several important advantages over a similarly sized
First, if there are
random sample.
economic gains from a takeover, they are most
likely to
be detected when the
total
target firm
is large.
Second, while the sample consists of a small fraction of the
number of
for a
acquisitions in the sample period, the total dollar value of the
significant portion of the dollar value of takeover activity.'*
50 firms selected accounts
Finally,
it is
less likely that the
acquirers in the sample undertake equally large acquisitions prior or subsequent to the events,
reducing the probability of confounding events.
The sample period (1979-83)
is
selected to focus on recent mergers and also to have
sufficient post-merger performance data.
To
select the acquisition sample,
we
identify the
382
3
See Caves (1989) for a review of the studies
that
examine the ex post perfonnance of merged firms.
4
The aggregate market value of equity of
is
the
50
target firms in
our sample one year prior to the
acquisition
$43
billion.
Post-merger corporate performance
merger-related delistings on the
P^g^ ^
the sample period.
CRSP database in
.
The names of the
acquirers
are identified from the Wall Street Journal Index
the
The sample comprises acquisitions involving
criteria: the
50
largest targets that satisfy the following
two
acquirer
is
a
US company which is
companies.
listed
on
the
NYSE or ASE,
is
and the
target
and acquirer
as the
are not financial or regulated
Target firm size
computed from Compustat
market value of
common
stock plus the book
values of net debt and preferred stock at the beginning of Uie year prior to the acquisition.
Acquisitions are deleted from the sample
post-acquisition financial information
utilities)
is
if the
acquirers are
non-US or
private companies since
not available for these mergers. Regulated (railroads and
and financial firms are deleted because they are subject to special accounting and
regulatory requirements,
making them
difficult to
compare with other firms.
Table
1
reports descriptive statistics
on
the time distribution of the
sample mergers,
Panel
their
industry distribution, and relative sizes of the target and acquiring firms.
A
of die table
shows
that twelve of the fifty
sample mergers
are
completed
in
1981 and fourteen in 1983. The
remaining 24 mergers are approximately evenly distributed over the other three sample years.
Since the sample
is
clustered in time, the sample firms' post-merger performance
is
likely to
be
influenced by economy-wide changes.
Our
their
tests, therefore,
control for these factors by
comparing sample
firms'
performance with
corresponding industries'. Evidence in Panel
B
shows
that the
sample targets and acquirers represent a wide cross-section of Value Line
target firms
industries.
The
belong to 27 different
industries; the acquiring firms
come from 33
different industries.
A
list
of target and acquirer firms
in
our sample and a description of their
businesses
is
reported in an appendix.
Summary
Panel
statistics
on the
relative sizes of the target
and acquirer firms are reported
in
C
of Table
1.
The
sizes of targets
and acquirers
are
measured by the book value of net debt
Post-merger corporate performance
poge 5
and marketable
securities) plus the
Oong-term
debt, plus short-term debt, less cash
market value
of equity one year prior to the merger. The relative size of the two firms
the target to that of the acquirer.
is
the ratio of the size of
On
average, the target firm
is
42%
of the assets of the acquirer,
indicating that the acquisition
is
a significant economic event for the purchasing fums.
Descriptive statistics on the
method of accounting, number of
Panel
bidders, and
method of
payment, are reported
transactions
in
Table 2 for the 50 mergers.
for
A
shows
that the majority of
that
(80%) are accounted
under the purchase method. Panel B shows
most of the
acquisitions (70%) are uncontested.
Twenty percent
are contested by
two bidders (including the
bidders.
ultimate acquirer) and only ten percent of the transactions attracted
distribution of the basis of
more than two
in the
The
payment
in
Panel
C
indicates that
payments
form of 100% cash,
100%
stock and a combination of cash and stock are equally
common.
2.2
Performance Measurement
We use pre-tax operating cash flows to measure improvements in operating performance.
We define operating cash flows as sales, minus cost of goods sold, and selling and administrative
expenses, plus depreciation and goodwill expenses. This measure
is
deflated by the market value
is
of assets (market value of equity plus book value of net debt) to provide a return metric that
comparable across firms. Unlike accounting return on book
the effect of depreciation, goodwill, interest expense/income,
assets,
our return measure excludes
and
taxes. It is therefore unaffected
by the method of accounting for the merger (purchase or pooling accounting) and/or the method
of financing the merger (cash, debt, or equity).
difficult to
As discussed below,
these factors
make
it
compare
traditional accounting returns of the
merged firm over time and
cross-
sec tionally.
Post-merger corporate performance
Effects of Purchase
poge 6
and Pooling Accounting
requires that the assets and liabilities of target firms be restated at
The purchase method
their current
market values.
No
such revaluation
is
permitted under the pooling method.
Further, under the purchase
price
method the acquirer records any difference between the acquisition
liabilities
and market value of identifiable assets and
it.
of the target company as goodwill, and
amortizes
first
No
goodwill
is
recorded under the pooling-of-interests method. Finally, for the
year of the merger, the purchase method consolidates results of the target with those of the
acquirer from the date the merger took place; the pooling firms from the beginning of the year regardless of
method consolidates
merger took place.
results for the
two
when
the
The same transaction
typically results in
lower post-merger earnings under purchase
accounting than under pooling. The purchase method increases depreciation, cost of goods sold,
and goodwill expenses subsequent to the takeover. Also,
usually lower under purchase accounting because
it
in the
year of the merger, earnings are
consolidates the target's earnings with the
acquirer for a shorter period of time than pooling.
The lower earnings reported under
method of accounting
for the
the
purchase method are entirely due to differences
in the
merger and
not due to differences in economic performance. Furthermore, post-merger book assets under
the purchase
method wiU be
It is
larger than those under pooling because of the asset write-up
under
the purchase method.
therefore misleading to
compare pwst- and pre-merger accounting
rates of return for firms that use
purchase accounting to infer whether there are economic gains
from mergers.
transaction.
In our sample,
80%
of the firms use the purchase method to account for the
Post-merger corporate performance
a time-series basis
pog^ 7
methods of accounting for
the merger.
when
firms use different
We exclude
the first year of the merger in our analysis because of the differences between the purchase and
pooling methods in timing the consolidation of the target with the acquirer. Excluding the
first
year also mitigates the effect of inventory write-ups under the purchase method, since
inventory
is
this
usually included in cost of sales in the merger year. 5
is
Since the asset base in our
it is
return metric
the market value, rather than
to record the
book
value, of assets,
also unaffected by the
accounting method used
merger.
Effects of Method of Financing
Mergers
Post-acquisition accounting earnings are also influenced by the
method of financing
the
merger. Accounting income
is
computed
after deducting interest
expenses (the cost of debt), but
is
before allowing for any cost of equity. Thus,
post-acquisition profits will be lower than
if
if
an acquisition
acquisition
financed by debt or cash,
its
the
same
is
fmanced by
stock. Since the
differences in earnings reflect the financing choice and not differences in economic performance,
it is
misleading to compare reported accounting earnings, which are computed after interest
for firms that use different
income and expense,
methods of merger financing. Panel
C of Table
2 shows that cash and stock methods of financing are equally
common
in
our sample.
We use
operating cash flows before interest expense and income from short-term investments deflated by
the market value of assets to measure performance. This cash flow return
is
unaffected by the
choice of fmancing.
5
Firms using the LIFO inventory valuation method expense the written-up inventory as inventory layers
are depleted,
making
it
difficult to
determine
not
make any
adjustments for these firms.
when to adjust However, this
earnings for the effect of the write-up.
is
We therefore do
bias in our
unlikely to lead to a serious
downward
earnings measure since
LIFO
inventory liquidations are relatively infrequent.
Post-merger corporate performance
2.3
page 8
Performance Benchmark
We
the
add the accounting data of the
target
and bidding firms prior to the merger
to obtain
pro forma pre-merger performance of the combined firms.
to this
Comparing
the fwst-merger
in
performance
pre-merger benchmark provides a measure of the change
performance.
to
But some of
the difference
between pre-merger and post-merger performance could be due
Hence,
economy-wide
target
or industry factors.
we
use the industry-adjusted performance of the
to evaluate the
and bidding firms as our primary benchmark
post-merger performance.
Industry-adjusted performance measures are calculated by subtracting the industry median from
the sample firm value.
The data
for
merging firms are excluded when calculating the industry
median. Value Line industry definitions immediately prior to the merger are used for the target
and acquirer
in
both the pre-merger and post-merger analysis. Industry data are collected from
Compustat
Industrial
and Research
files.
2.4
Comparison with Prior Research
We examine more recent mergers than those analyzed by
performance. Ravenscraft and Scherer's sample
is
previous studies of post- merger
to 1977.
from the period 1950
,
While Herman
and Lowenstein
data after 1981.
select firms that
merge
in the
period 1975 to 1981 they have limited post- merger
Neither
Herman and Lowenstein, nor Ravenscraft and Scherer examine performance
expectations prior to the merger, or restate earnings and assets for firms using purchase
accounting, making
their return
it
difficult to interpret their findings.
in the
Herman and Lowenstein do
not adjust
fail to
on equity measure for differences
method of financing the merger, and
control for the effect of common industry shocks on post- merger earnings performance.
Post-merger corporate performance
Ravenscraft and Scherer focus exclusively on lines of business.
not obvious
page 9
It is
why
gains from mergers would only be reflected in the acquired segments; synergies are just as likely
to
improve the performance of the other
line of business data
lines of business
of the acquiring firms. They also use
Definitions of business
FTC
which have several potential problems.
after
segments may change systematically
mergers
if
acquirers restructure their operations.
Results of tests using segment data reported to the
FTC
are also likely to be difficult to inteipret
since reporting firms have incentives to use accounting discretion to reduce the likelihood of antitrust suits
by the
FTC
(see Watts and
Zimmerman
(1986)).
3.
Cash Flow Return Performance
Operating Cash Flow Returns before Industry Adjustments
3.1
To
the target
construct the pre-merger performance benchmark,
we
aggregate the cash flow data for
for the
and acquiring firms to determine the pro forma performance measures
-1).
combined
firm in each of the five years before the merger (years -5 to
Performance measures for the
combined firms
where
are weighted-averages of values for the target and acquiring firms separately,
the weights are the relative sizes of the
two firms
at the
beginning of each year.
The
0, the
pre-tax operating cash flows of the
is
merged firm
are
computed
for years
First,
1
to 5.
Year
the
year of the merger,
excluded from the analysis for two reasons.
many of
acquiring firms use the purchase accounting method, implying that in the year of the merger the
two firms
are consolidated for financial reporting purposes
from only
the date of the merger.
Results for this year are therefore not comparable across firms or for industry comparisons.
Second, year
difficult to
figures are affected
by one-time merger costs incurred during
that year,
making
it
compare them with
results for other years.
Post-merger corporcue performance
page 10
Pre-tax op»erating cash
We deflate the operating cash flows by the market value of assets.
flow returns are computed as the ratio of pre-tax operating cash flows during the year to the
market value of assets at the beginning of the year. The market value of assets
the beginning of
is
recomputed
at
each year to control for changes
is
in the size
of the firm over time.
For pre-
merger years the market value of assets
the
sum of the
is
values for the target and acquiring firms.
The market value of assets of the combined firm
used in the post-merger years.
We exclude
the
change
in equity values of the target in the
and acquiring firms
at the
merger
announcement from the asset base
post-merger years. 6
This adjustment
is
important
because an efficient stock market capitalizes the value of any expected improvement in equity
prices at the merger
announcement.
If this
equity revaluation
will not
is
included in the asset base, the
increase, even
measured pre-tax operating cash flow returns
the
show any abnormal
when
merger
results in an increase in operating cash flows.
For example, consider an acquiring
firm (company A) and a target (company T) with annual operating cash flows of $20 and $10
respectively forever.
Both firms have the same cost of capital (10%), implying
$1(X) respectively. Therefore, a portfolio
that their market
values are
$200 and
comprised of
A
and
T has a market
that
value of
acquires
$300 and cash flows of $30, producing an annual
return of
10%. Suppose
when
this
A
$5
T combined cash
at
flows increase to $35 per year.
An
efficient
market capitalizes
improvement
$50. If post-merger cash flow returns are computed as the ratio of post-merger
cash flows ($35) and post-merger assets including the
premium ($350), measured performance
of
will be identical to the pre-merger operating return for the portfolio
A
and
T
(10%). There
is
no improvement
increased by $5.
6
in the
measured cash flow return even though cash flows per year have
is
Our measure of performance
computed
as the ratio
of post-merger cash flows
before the
The change in equity value of the target at the announcement of the merger is measured from five days was announced (not necessarily by the ultimate acquirer) to the date the target was delisted from trading on public exchanges. The change in equity value of the acquirer is measured from five days before its first offer was announced to the date the target was delisted from trading on public exchanges.
first offer
1
Post-merger corporate performance
page
1
($35) and post-merger assets excluding the asset revaluation ($350-$50). This return measure
(1
1.7%) correctly
reflects the
improvement
in operating
performance after the merger.
Panel
A of Table 3
and
1
reports
median pre-tax operating cash flow returns
returns range
for the
merged firm
to
in years -5 to -1,
to 5.
The median pre-tax operating
from
26%
27.5%
in
the five years before the merger.
After the merger, the median pre-tax operating returns are
lower, ranging from
19%
to
23%
with a median annual value of 21.8% for the whole period.
is
This indicates that post-merger performance
lower than the pre-merger benchmark.''
These data do not adjust for the impact of contemporaneous events on the merged
firms'
cash flow returns that are unrelated to the merger, and are therefore difficult to interpret. For
example, since
to overall
we
deflate cash flows
by
the
market value of
assets,
changes
in equity values
due
market movements will affect the measured returns over time. Equity values increased
during most of our sample period. This
may
explain the decrease in the cash flow returns in the
post-merger period.
We
focus on industry-adjusted performance measures because they
incorporate any contemporaneous changes in the overall cash flow performance and equity values
of the industry.
3.2
Operating Cash Flow Returns after Industry Adjustments
Industry-adjusted cash flow returns are the differences between values for the
merged
firm and
its
weighted-average industry median estimates. Prior to the merger industry values for
the sample firms are constructed by weighting median performance measures for the target and
acquiring firms' industries by the relative asset sizes of the two firms at the beginning of each
' To calculate the sample median pre-tax operating cash flow return for years 1 to 5, we first compute the median return in these years for each sample firm. The reported sample median is the median of these values. Sample median returns in the jwe-merger period are calculated in the same way.
Post-merger corporate performance
page 12
year. In all of the post-merger years target and acquirer industry cash flow returns are weighted
by the
relative asset sizes of the
two firms one year before
the merger.
The
industry-adjusted data reported in Panel
B
of Table 3
show
that
merged firms have
superior pre-tax operating cash flow returns on assets relative to their industries' in the post-
merger period. The industry-adjusted pre-tax operating return on
assets for the
merged firms
zero.
is
2.7%
in
year
1,
3.8%
in
year
2,
and 2.7%
in year 3, all significantly different
from
Years 4
and 5 also exhibit superior performance
statistically significant
relative to the industry, but these differences are not
is
Overall, the annual median pre-tax return in the five post-merger years
in the post
2.8%. Stated differently, the merged firms' pre-tax operating returns
are about
merger period
15%
larger than their industries' returns. 8
In contrast,
no
supjerior industry-adjusted
pre-tax operating cash flow returns occur in the five years before the merger; the median annual
return
is
0.4%.
In Panel
C
of Table 3
we
report the sample median difference in the industry-adjusted
performance
in the post-
and pre-merger periods.^
The improvement
is
in industry-adjusted pre-tax
operating cash flow returns in the post-merger years
confirmed; the median difference
is
in
industry-adjusted returns between the post- and pre-merger periods
reliable.
2.2%, which
is statistically
The
industry-adjusted results are strikingly different from the operating cash flow returns
8
We calculate the percentage increase relative to the industry as 2.8/(21.3-2.8).
To compute
the
9
first
sample median performance difference between the post- and pre-merger periods,
we
calculate the median returns for each sample firm in the post- and pre-merger years.
We
then compute
differences in the medians for each fum.
The median of these pairwise
differences
is
the sample median.
Post-merger corporate performance
page 13
before industry adjustment. The industry-adjusted results show a significant increase in post-
merger performance and the unadjusted returns show a decrease
Industry-adjusted returns are a
in
post-merger performance.
more
reliable
measure of performance since they control for
are also confounded
industry events unrelated to the merger.
However, they
by two
factors.
First, they are sensitive to the definitions
of industries used in the analysis.
To
test
whether the industry-adjusted
results are sensitive to the particular industry definitions
employed
by Value Line, we use a market performance benchmark.
as the
tapes.
We estimate the market index each year
median operating cash flow return for
all
firms on the Compustat Industrial and Research
The
difference in the pre-merger
is
and post-merger market-adjusted cash flow return for the
in
sample firms
4.5%, confirming improvements
industry-adjusted performance.
Second, industry-adjusted returns can increase in the f)Ost-merger period even
when cash
flows remain constant or decline
their industries
.
if
the market value of sample firms' assets decline relative to
Increased returns resulting from decreased asset values cannot be interpreted as
evidence that there are economic gains from mergers.
To
test
whether there are declines
in post-
merger market equity values of the sample firms
relative to their industries,
we compute
the
difference between the annual stock returns for the sample firms and their industries in years
surrounding the merger.
The industry-adjusted equity
returns of the sample firms are
insignificant in the post-merger period (as well as in the pre-merger period).
The
industry-
adjusted returns are:
0.4%
in year 1,
0.4%
in year 2,
0.2%
in year 3,
-3.7%
in
year 4, and 3.7%
in year 5. This implies that the
improvements
in
post-merger industry-adjusted cash flow returns
in their
are
due
to increases in
sample firms' operating cash flows rather than declines
market
values.
Post-merger corporate performance
3.3
page 14
Components of Industry Adjusted Cash Flow Returns
The improvements
in pre-tax
cash flow returns in the post-merger period can arise from a
variety of sources. These include improvements in operating margins, increased asset
productivity, or decreased labor costs. Alternatively, they
may be
achieved by focusing on shortthis section
term performance improvements
at the
expense of long-term viability of the firm. In
we
provide evidence on which of these sources contribute to the sample firms' post-merger cash
in the text
flow return increases. The specific variables analyzed are italicized
Table
4.
and are defined
in
The
results are reported in Table 5.
Operating Performance Changes
The pre-tax operating cash flow
return on assets can be
decomposed
into pre-tax
cash
flow margin on sales and asset turnover.
Pre-tax cash flow margin on sales measures the
operating cash flows generated per sales dollar.
Asset turnover measures the sales dollars
generated from each dollar of investment in assets. The variables are defined so that their product
equals the pre-tax operating cash flow return on assets.
The
returns
is
results in
Table 5 suggest that the increase in industry-adjusted pre-tax-operating
attributable to an increase in asset turnover, rather than an increase in pre-tax operating
margins.
-0.3,
In years -5 to -1 the
merged firms have industry-adjusted median
thirty cents less sales
asset turnover of
implying that they generated
than their competitors for each dollar of
in their industry-adjusted asset
is
assets.
The merged firms show
a significant
improvement
1
turnover ratios in the post-merger period. In years
0.1, indicating that the
to 5 the industry-adjusted asset turnover
sample firms generate ten cents more sales than
their industry counterparts
for each dollar of assets.
is 0.2,
The sample median
significant
difference in asset turnovers between these periods
which
is statistically
The merged firms
also have higher pre-tax operating
1
Post-merger corporate performance
page 15
post-merger years. But these cannot be attributed to
margins on sales than
the
their industries in the
merger
itself,
since operating margins of the
merged firms
are also higher than those of their
industries in the pre-merger period. lO
The difference between
the prein
and post-merger industry
adjusted operating margin
that the
is
insignificant.
The absence of changes
operating margins suggest
post-merger cash flow improvements are not due to increases in monopoly rents. Rather,
to use their assets
merged firms seem
more productively.
Mergers also provide the acquirer with an opportunity
labor contracts to lower labor costs and achieve a
Schleifer and
to renegotiate
expHcit and implicit
more
efficient
mix of
capital
and labor (see
Summers
(1988)). Because
we
are unable to obtain sufficient data
on wages
to analyze
direcdy,
we examine employee growth
rates
and pension expense per employee
mergers.
changes
in labor costs in years surrounding the
The median number of employees
industry-adjusted employee growth rate
declines in each of the post-merger years. Overall, the
is
significantly less than in the pre-merger period,
n
There
is
also evidence of a decline in pension expense per
significantly higher
employee
after the merger. Before the
merger the sample firms have a
industries. After the
pension expense per employee than their
is
merger the pension expense of the merged firms
reduced
to the
same
level
as the industry. are followed
There are two ways to view these findings. One interpretation
in operating efficiency
is that
mergers
by improvements
to a
through reduced labor costs. Alternatively,
mergers lead
wealth redistribution between employees and stockholders through
10 Prior to the
merger, the higher operating margins are primarily due to higher industry-adjusted margins
their industries in these years.
by acquirer. Targets do not show higher operating margins than
1
Wages
per employee for the merged firms also decline relative to the industry after the merger.
However,
wages.
this finding
should be interpreted with caution since only a small number of firms report information on
Post-merger corporate performance
renegotiations of explicit and implicit
page 16
employment
contracts.
Whatever
the explanation, the
magnitude of labor cost reductions
there are
in the
post-merger period does not appear to be large since
no
significant changes in the post-merger operating margins.
Investment Policy Changes Since our analysis
is
limited to only five years after the merger,
this period.
we cannot provide direct
short-
evidence on cash flows beyond
To
assess whether the
merged firms focus on
term performance improvements
capital outlays, and research
at the
expense of long-term investments,
we examine
their
and development (R&D).
Tliese expenditure patterns are reported in
Table
5.
The median
1
capital expenditures as a percentage
of assets
is
15%
in the
pre-merger
period and
-5 to -1,
1%
in the
post-merger years. The median
1
R&D expense
and
is
2.1% of
assets in years
and 2.4%
in years
to 5.
The
capital expenditures
R&D of the sample firms
are
not significantly different from those of their industry counterparts in either the pre- or the post-
merger periods.
Asset sales
policies.
It is
is
another area where merged firms can potentially change their investment
possible that post-merger improvements in asset turnover arise from the sale of
assets with
low turnover.
on
We
therefore
examine
asset disposals in the pre-
and post-merger
years. Statistics
asset sales as a percent of the market value of assets are reported in Table 4.
The median
asset sales for the
merged firms
are
1.6% and 0.9% of assets
in the pre-
and post-
merger periods respectively. The merged firms have significantly higher asset
their industry counterparts both before
sales rates than
and
after the
merger.
However,
there
is
no
significant
all
difference in industry-adjusted asset sales before and after the merger. Further, asset sales in
years are small in magnitude relative to capital expenditures or the market value of total assets.
7
Post-merger corporate performance
In
page
1
summary, we find
that
merged
firms have significant
improvements
in
cash flow
increased
operating returns in the five years following mergers. These improvements
asset productivity.
come from
There
is
no evidence of increased asset
sales, or decreased capital
expenditures or
R&D following mergers.
4.
Relation Between Cash Flow
And
Stock Price Performance
is
Our post-merger data on cash flow performance
consistent with the hypothesis that the
stock market revaluation of merging firms at merger announcements reflects expected future
improvements
in operations.
A more powerful test of this hypothesis
is to
correlate the mergerIf the
related stock market performance and the post-merger cash flow performance.
stock
market capitalizes these improvements, there should be a significant positive correlation between
the stock market revaluation of
merging firms and the actual post-merger cash flow
improvements.
Stock Returns at Merger Announcements
Market-adjusted stock returns for the target and acquirer
at the
announcement of
the
merger are reported
before the
target
first
in
Panel
A of Table 6.12
Returns for the target are measured ft"om five days
offer
was announced
(not necessarily by the ultimate acquirer) to the date the
was
delisted
from trading on public exchanges. Returns for the acquirer are measured from
offer
five days before
its first
was announced
to the date the target
was
delisted
from trading on
public exchanges. Similar to findings reported by earlier studies, target shareholders earn large
positive returns from mergers
(mean 45.6%, and median 41.8%), and acquiring stockholders
earn insignificant returns.
12
Risk-adjusted returns,
computed using pre-merger-announcement market model
estimates, are similar
to the market-adjusted returns reported in the papCT.
Post-merger corporcae performance
page 18
for the
We
also
compute the aggregate market-adjusted return
is
two firms
in the
merger
announcement
target
period. This return
the weighted average of the market-adjusted returns for the
and
acquirer,
where
the weights are the relative market values of equity of the
two firms
prior to the merger
announcement period. The mean aggregate
is
return, reported in Panel
A of
Table
6, is
9.1%, and the median
6.6%. Both these values are significantly different from zero.
These findings
are consistent with those of Bradley, Desai,
and
Kim
(1988).
Relation Between Announcement Returns and Post-Merger Cash
Flow Improvements
merger announcements can be
In Section 3
Our
tests
examine whether the change
in equity
values
at
explained by cash flow improvements in the post-merger period.
we measured
post-
merger performance using cash flow return on assets whereas the merger announcement returns
computed above
are return
on
equity.
Therefore, before
we
correlate
announcement returns and
cash flow improvements,
we compute
asset returns at merger announcements
from equity
returns to ensure that the anticipated gains from mergers and ex post measured gains are
comparable.
Asset returns
at the
merger announcement (A VAO
are weighted averages of returns to
equity (aE/E) and debt (aD/D):
jlY = I^iEiE + £AD}D
(1)
V
Assuming
the equity
at the
E V
D V
that the value
of debt does not change
at
takeover announcements, asset returns equal
announcement returns multiplied by
the equity-to-assets ratio (E/V)A'i
We use leverage
ratio.
beginning of the year of the takeover announcement to compute the equity-to-asset
13
A
number of studies including Asquith and Kim (1982), report evidence consistent with
this
assumption.
9
Post-merger corporate performance
poge
and
1
Summary
combined firms
targets are
statistics
on
the estimated asset returns for the target firms, acquiring firms,
are reported in Panel
B
of Table
6.
The mean and median
are 8.8%,
asset returns for the
40.6% and 32.5%, and
for the
combined firms
and 5.2%.
The
asset
returns for the bidding firm are insignificant
The hypothesis
that
merger-induced abnormal returns
reflect the capitalized value
of future
cash flow improvements implies:
aV
where
= PV(CF)
(2)
AV
is
the change in the market value of assets at the merger announcement,
PV
(2)
is
the
present value operator, and
CF
is
the vector of cash flow improvements.
Equation
can be
converted to a returns model by dividing both sides of the equation by V:
^V V
Consistent with equation
(3),
= py(CF)
V
(3)
we
estimate the following cross-sectional regression:
ARETi= a
Where
+
pCFRETi
+
Ei
(4)
ARET is
the
combined
firms'
measured abnormal
asset retiun at the
merger announcement
(unlevered abnormal equity returns) and
CFRET
is
the
median annual industry-adjusted pre-tax
operating cash flow return in the post-merger period.
The valuation model (equation
(4)
(3))
does not have a constant, implying that the intercept
in
should equal zero.
Since
ARET
is
the capitalized value of future cash flow return
improvements, and
CFRET is the pre-tax
cash flow return improvement per year, the slope in (4)
equals the present value factor at the pre-tax capitalization rate.
capitalization rate
is
For example,
if
the pre-tax
20%,
the slope coefficient
last for five years.
would be 5
if
the
improvements are perpetual, and
rate
2.99
if the
improvements
For a capitalization
of 30%, these coefficients
Post-merger corporate performance
poge 20
would be 3.33 and 2.44
respectively.
The estimates of
regression equation (4) are reported in Panel
A
of Figure
1.
The
regression has an R2 of 21%, implying a cross-sectional correlation of 0.46 between the asset
returns at the merger announcement
the estimated slope coefficient
is
and the realized improvements and
in cash
flow returns. While
is
positive
statistically reliable, its
magnitude
only 0.96,
implying a very high discount rate. Also, the intercept
is statistically
significant.
However, these
regression estimates are likely to be biased since the operating cash flow returns have substantial
measurement
error.
This measurement error results
bias in the
in
a
downward
bias in the estimated slope
coefficient and an
upward
estimated intercept (see Johnston (1972)).
To provide
a
bound on the coefficient estimates, we reverse
in (4)
the
dependent and
independent variables
and estimate the following regression equation
:
CFRET = Y
i
+
XARETi
1.
+ Vi
(5)
The
results are reported in Panel
B
of Figure
The estimated
slope coefficient in equation (5)
is
0.22.
That
is,
the market capitalization rate
is
22%
if
the
improvements are a perpetuity. This
(4).
estimate corresponds to a slope coefficient value of 4.55 in equation
in
The estimated
intercept
equation (5)
is
insignificant
These regression estimates are more
in line with the predicted
values. 14
Since the regression analysis
is
affected by measurement error,
we also compute
a hack-
le Specification tests are
conducted for regression equations (4) and
(5) to assess
whether the residuals are
honwskedastic (see White (1980)), and normally distributed. We cannot reject the hypotheses that the residuals are homoskedastic and normally distributed at the 0.05 level. Belsley, Kuh and Welsch (1980) diagnostics for the effect of extreme observations on the coefficients, and for multicollinearity indicate that the reported estimates are
not influenced by extreme observations. Finally,
variables in the regression.
we
estimate Spearman
is
Rank Correlation
coefficients
between the
The
correlation
is
0.45 and
significant at the 0.01 leveL
1
Post-merger corporate performance
page 2
of-the-envelope estimate of the merger announcement asset return implied by the sample median
cash flow improvement.
The data
on
in
Table 3 indicate that the merged firms' median annual preis
convert this to a rough estimate of the value change,
risk of
we assume
that the
risk of the
improved performance equals the
an average security.
We
use an
8%
risk
premium along with a 10%
gain
is
risk free rate for an
18%
before-tax cost of capital. If the cash flow
is
treated as a perpetuity, the implied increase in the asset value
lasts for just five years, the asset
12%.
If the
increased
performance
value increase
is
about 6.6%. The actual mean and
median
asset returns at the
merger announcement reported
in
Table 6 are consistent with these
rough estimates.
In
summary,
the
abnormal equity returns for the combined firms
at
the
merger
announcement
are broadly consistent with the value increases implied
by the post-merger cash
flow return increases.
5.
Discussion
Our
finding that cash flows increase following mergers advances the debate on mergers
there are cash flow changes after these transactions to
in
from whether
why
these cash flow
improvements occur. The improvements
of increased asset productivity.
sample firms' cash flow returns are primarily a result
attributed to tax
The reported post-merger gains cannot be
They cannot be
benefits, since the cash flow returns are pre-tax.
attributed to increased
is
monopoly
rents since there is
no increase
in
post-merger sales margins. While there
some
evidence that gains
come
at the
expense of labor, reduced labor costs do not significantly increase
Finally, there
is
sample firms'
profitability.
no decrease
in capital outlays
and
R&D
expenditures, or increase in asset sales after the merger, indicating that merged firms do not
Post-merger corporate performance
reduce
their long-term investments.
P<3ge
22
Our
findings raise
two
interesting questions. First, are the increases in cash flow returns
and asset productivity caused by the merger, or would they have occurred even without a merger?
Mergers can lead
to increased asset productivity if
sub-optimal policies pursued by the target or
the acquirer prior to the merger are eliminated, or if they provide
new
opportunities for using
existing resources of the merging firms. In contrast, if mergers arise
target firms by the stock market, there will be
from undervaluation of the
is
improvements
in
cash flows whether or not there
a merger. Acquirers that anticipate the cash flow improvements will pay a
targets.
premium
to acquire the
A
second interesting question
is
what are the economic factors
that explain the cross-
sectional variation in post-merger cash flow changes?
While
there
is
an improvement in cash
flow performance on average, a quarter of the sample firms have negative post-merger cash flow
changes. These firms
may have performed
poorly because of bad luck. Alternatively, there
to these outcomes.
may
have been systematic business and managerial reasons which led
These questions, which have important managerial and public policy implications, can
only be answered by developing structural models of
not attempt
to
how mergers improve cash
flows.
We do
undertake such an ambitious exercise in this paper. However,
we do provide some
preliminary evidence and suggest directions for future research.
One
popular structural model of
how mergers improve
cash flows
is
that they
provide
opportunities for economies of scale and scope, synergy, or product market power. This implies
that mergers by firms that have related products or production will
show
greater cash flow
.
Post-merger corporate performance
page 23
improvements than mergers between unrelated firms. 15
classifying our sample firms as related or unrelated, and by
mergers into related and uru-elated categories by examining the reasons
in the
mergers stated by the sample firms' managers
is
merger prospectuses. The
stated reason
in the
potential to exploit product similarities or other associations
the
most commonly
For example, the managers of Maryland Cup and Fort Howard Paper Co. (both
products industry) expected the merger to create "a
result
paper
number of new business
opportunities as a
of the compatibility of the two companies' businesses and customers." In addition, they
argued that "Maryland
Cup
could benefit from Fort Howard's production experience."
for
The
second most frequently stated reason
merging
is
to reduce earnings volatility, as in the
Raytheon
/
Beech Aircraft merger. The managers of Raytheon
anticipated that the acquisition
would "provide Raytheon with
better balance
additional stability through product diversification as well as a
sales
between commercial and government-generated
is
and earnings."
We examine
whether there
a difference in post-merger cash flow returns for
sample mergers undertaken to
exploit synergies
and other mergers, and
find
no difference between the two groups.
The
relation
between
the
merging firms' businesses does not appear to be the sole
determinant of post-merger performance. For example. Pan
in the airline business, yet their
Am and National AirUnes were both
Am expected the acquisition to
edge over
later
merger was unsuccessful. Pan
to
its
expand the domestic feeder routes
15
international flights, providing a competitive
Kaplan and Weisbach (1990) find
that acquirers
of firms in unrelated businesses are more likely to
divest these targets than acquirers of related businesses.
Post-merger corporate performance
other international carriers.
airline, especially in the
page 24
the expertise to run a domestic
However, the company did not have
competitive conditions after deregulation.
Further,
Pan
Am
later
divested
coast.
its
Pacific routes, reducing the value of the National's domestic services to the west
Given
the complexity
and heterogeneity of reasons for mergers,
we
believe that large
that
sample studies are unlikely to provide significant new insights into the structural factors
influence the outcomes of mergers.
A
promising approach
is
to
examine a smaller number of
evidence on the
mergers
in greater detail.
These
clinical studies will provide valuable
mechanisms through which mergers increase cash
research.
flows, and will be fruitful avenues for future
6.
Summary
This paper examines the post-acquisition operating performance of merged firms using a
sample of the 50 largest mergers between U.S. public industrial firms completed
in the period
1979
to 1983.
We
find that
merged firms have
from increases
significant
improvements operating cash flow
returns after the merger, resulting
in asset productivity relative to their industries.
These cash flow improvements do not come
sample firms maintain
merger. There
is
at the
expense of long-term performance, since
their capital expenditure
and
R&D rates relative to their industries after the
a strong positive relation between post-merger increases in operating cash flows
at
and abnormal stock returns
merger announcements, indicating
that expectations
of economic
improvements underlie
the equity revaluations of the
merging firms.
Post-merger corporate performance
page 25
REFERENCES
Asquith, Paul, 1983, Merger bids, uncertainty, and stockholder returns, Journal of Financial 11, 51-84.
Economics,
Asquith, Paul, and E. Han Kim, 1982, The impact of merger bids holders. Journal of Finance 37, 1209-1228.
on
participating firms' security
Bradley, Michael,
Anand Desai and
E.
Han Kim,
offers: Information or synergy?. Journal
1983, The rationale behind interfirm tender of Financial Economics, 11, 183-206.
Bradley, M., A. Desai and E. Kim, 1988, Synergistic gains from corporate acquisitions and their division between the stockholders of target and acquiring firms, Journal of Financial Economics, 21, 3-40.
Bull, I., 1988, Management Performance and leveraged buyouts: Unpublished paper, University of Illinois at Urbana-Champaign.
E., 1989, Effect of Mergers and Acquisitions on the Organization Perspective.
Dodd, Peter and Richard Ruback, 1977, Tender
analysis. Journal of Financial
offers
and stockholder returns:
An
empirical
Economics,
5,
351-374.
Herman, E. and L. Lowenstein, 1988, The efficiency effects of hostile takeovers, in J. Coffee Jr., L. Lowenstein and S. Rose-Ackerman, eds.. Knights, raiders and targets: The impact of the hostile takeover, (Oxford University Press, New York, NY).
Jensen, M. and R. Ruback, 1983, The market for corporate control: Journal of Financial Economics, 1 1, 5-50.
The
scientific evidence.
Johnston,
J.,
1972, Econometric Methods, Second Edition, (McGraw-Hill,
New
York, NY).
Kaplan, S., 1990, The effects of management buyouts on operating performance and value, Journal of Financial Economics, forthcoming.
Kaplan, S. and M. Weisbach, 1990, Acquisitions and diversification: What much does the market anticipate? Working paper. University of Chicago.
is
divested and
how
Ravenscraft, D., and F. M. Scherer, 1987, Mergers, selloffs, and economic efficiency, (Brookings, Washington, D.C.)
R., Do target shareholders lose in unsuccessful control contests?, in Corporate Takeovers: Causes and Consequences, National Bureau of Economic Research, 1988.
Ruback,
Schleifer, A. and L.
Summers, 1988, Breach of
trust in hostile takeovers, in
Corporate
Post-merger corporate performance
Takeovers: Causes and Consequences, National Bureau of Economic Research.
page 26
Smith, A., 1990, Corporate ownership structure and performance: buyouts, Journal of Financial Economics, forthcoming.
The case of management
Post-merger corporate performance
page 27
Table
1
distribution
Descriptive statistics on time distribution of mergers, industry and relative asset sizes for 50 acquiring and 50 target firmsa
Panel A: Distribution of Merger Years
Number
1979 1980
1981
of firms
Percent of firms
9
6 12
18 12
24
18
1982 1983
Total
9 14
28
100
50
Panel B: Distribution of Target and Acquiring Firms' Industries
Target firms
Acquiring firms
Number
of industries
1
27
15 8
33
Industries with
firm
22
9
Industries with 2 firms
Industries with 3 firms Industries with 4+ firms
2 2
in
2
6
Maximum number of firms
one industry 7
Panel C: Relative Asset Sizes of Target and Acquirers
Mean
First quartile
42.0%
16.5 31.1
Median
Third quarter
62.5
a
The sample mergers
are the largest acquisitions completed in the period 1979 to 1983 between public non-financial and
is
non-utility U.S. firms. Acquisition size
preferred stock for the target firm
the
size is the mailtet value of
at the
measured by the market value of common stock plus the book values of debt and beginning of the year prior to the acquisition. The merger year is the year in which
is
merger was completed. Relative
asset size
the target's size as a percent of the size of the acquiring firm,
where asset
common
stock plus the book values of debt and preferred stock at the beginning of the year prior
to the merger.
to
completion of the acquisition. Industries are based on Value Line industry definitions prior
Post-merger corporcae performance
page 28
Table 2
Summary
statistics on merger transaction accounting methods, number of bidders, method of payment, and merger type for 50 mergers in the period 1979 to 1983.
Panel A: Distribution offirms by method of accounting for merger
Accounting method
Purchase method Pooling of interests
78%
22
Panel B: Distribution affirms by number of bidders
Number of bidders
One
bidder bidders Three bidders Four or more bidders
76%
12
8
Two
4
Panel C: Distribution offirms by merger method ofpaymera
Method of payment
cash Cash and stock Cash and notes Cash, stock and notes
100% 100%
stock
24%
34 30
10
2
Post-merger corporate performance
page 29
Table 3
Firm and industry-adjusted median annual operating pre-tax cash flow return on assets for 50 combined target and acquirer firms' in years surrounding merger a
Year relative
to
merger
Post-merger corporate performance
page 30
Table 4
Definitions of variables used to analyze actual performance of 50 targets and 50 acquirers in years surrounding mergers
Variable
Definition
A. Operating Performance
Pre-tax operating margin
Earnings before depreciation,
sales
interest,
and taxes as a percent of
Asset turnover
Sales divided by market value of assets at beginning of year (the market value of common equity plus the book values of debt
and preferred stock)
Employee growth
rate
Change
in
number of employees
in the
employees
Pension expense/employee
as a percent of number of previous year
Pension expense per employee
B. Investment Policy
Capital expenditure rate
Capital expenditures as a percent of the market value of assets at beginning of year
Asset sale rate
Asset sales as a percent of the market value of assets of year
at
beginning
R&D rate
Research and development expenditures as a percent of the market value of assets at beginnig of year
M
oi
^
.-9
^^ 5§
u
•s
.a •=
o
o
a.
00
s e
E S 3
SJ
g
•I
1
i ^ ^
^ s
OO
C3
_
u 3
a-
•o
U
c
C3
s
.1.
OO
IS
1^
S
U
CI.
OO
u
^
o
3
>
8
Post-merger corporate performance
page 32
Table 6
Equity and asset returns
at
merger announcements for 50 target
in the
and acquiring firms merging
period 1979 to 1983
*
Panel A: Distribution of equity returns
Target equity
at
merger announcement
Acquiring equity
Combined
equity
Mean
First quartile
45.6%b
-2.2%
9.1%''
21.2%
41.8%''
16.6%
-3.6%
-2.9%
6.6%''
Median
Third quartiJe
64.1%
3.4%
16.7%
Panel B: Distribution of asset returns
Target firms
a The mergers are completed in the period 1978 to 1983. The unexpected asset return is computed by unlevering the combined equity announcement returns for the target and acquiring firms. The combined equity return for these firms is the sum of the market-adjusted change in equity value for the target and acquirer in the meigo' announcement period as a percentage of the sum of the pre-merger equity values for the two rirtns. Post-merger todustry-adjusted cash flow returns are
defined in table
3.
Post-merger corporate performance
page 34
Figure
1
continued
Relation between median px)st-merger industry-adjusted cash flow returns and
unexpected asset returns
at
merger announcements
for
50 merging firms*
Panel B:
CFRETj
=
a
+ p
ARETi +
ei
Median post-merger industry-adjusted
pre-tax cash flow returns
(CFRET)
70%
CFRET(i) =
0.01 + 0.22
(1.2) (3.3)
ARET(i)
-25% i
R
Unexjjected asset
returns
square = 0.21
(ARET)
.
Post-merger corporate performance
page 35
Appendix
Acquiring/Target Firms and their Industries
1. American Medical Intemarional /Lifemark American Medical owns and operates proprietary hospitals and other health care businesses, and
offers medical-technical support (including diagnostic, cardio-pulmonary, and physical therapy services, and management consulting services). Lifemark owns and manages general hospitals,
and provides cardio-pulmonary, physical therapy, pharmacy, and
2.
clinical laboratory services.
Anheuser-Busch Companies / Campbell Taggart Inc. Anheuser-Busch is the world's largest brewer of beer. Campbell Taggart's business is baking and distributing bread, rolls, crackers, cake and other sweet products, and food products.
Associated Drv Goods / Caldor Inc. Associated Dry Goods operates general department stores in 25 promotional discount department stores in five states.
3.
states.
Caldor operates 65
4.
Avon Avon is
Products Inc./ Mallinckrodt
the world's largest manufacturer of cosmetics
and
toiletries,
and also
sells
costume
jewellery and ceramics. Mallinckrodt develops and manufactures fine chemicals, drugs and other health care products, and chemicals for the food, cosmetics, laboratory, petrochemical and printing industries.
Best Products / Modem Merchandising Inc. Best and Modem Merchandising are both catalog showroom
5.
retailers.
Brown-Forman Distillers / Lenox Inc. Brown-Forman manufactures a wide variety of
6.
alcoholic beverages. Lenox operates produces furnishings (including china and crystal), and personal use products (including jewelry and luggage).
home
7. Burroughs Corp./ Memorex Corp. Burroughs is a major participant in the data processing and business computer equipment industry. Memorex develops, manufactures, markets and services a wide range of computer peripheral equipment systems, and products employed in the recording, retrieval, communication, and storage of information. 8. Coca Cola Co./ Columbi a Pictures Industries Inc. Coca-Cola is the largest manufacturer and distributor of
soft drink concentrates and syrups in the world. The company also manufactures citrus, coffee, tea, wine and plastic products. Columbia Pictures produces and distributes theatrical motion pictures, television series and features, amusement games, and commercials.
9. Con Agra Inc./ Peavey Co. Con Agra is a diversified food
processor engaged in agriculture (agricultural chemicals, formula feed, and fertilizers), grain (flour, by-products, and grain and feed merchandising) and food (frozen foods, broiler chicken, eggs, seafood, and pet products) industries. Peavey is also a diversified food processor and retailer engaged in grain merchandising, food processing (flour,
bakery mixes, and jams), and operating specialty
retail stores,
Post-merger corporate performance
poge 36
10. Cooper Industries /Gardner-Denver Cooper is a diversified, international corporation which produces consumer and industrial tools, aircraft services, mining and construction, and energy services. Gardner-Denver makes portable and stationary air compressors, drilling equipment for above- and underground, and air-operated
tools. 11. Dart Industries /Kraft Inc. Dart is diversified company
that manufactures and markets consumer products, including Tupperware containers, Duracell batteries, and West Bend appliances. Kraft manufactures food products and markets them to retail, industrial and food service customers.
12. Diamond Shamrock / Natomas Co. Diamond Shamrock is a domestic integrated
chemicals. Natomas
13.
is
principally
engaged
in
oil and gas company with interests in coal and petroleum exploration and production.
E. I. Du Pont de Nemours / Conoco Inc. Pont manufactures diversified hnes of chemicals, plastics, specialty products, and fibers. Conoco is engaged in the exploration, production, and transportation of crude oil, coal, and natural gas; petroleum refining; and the production, processing and transportation of chemicals.
Du
in areas of transportation, materials handling, industrial automation, security, construction, agriculture and consumer durables. Cutler-Hammer designs and manufactures electronic and electrical components and system for industrial, aerospace, air traffic control, semiconductor, housing, and consumer markets.
15. Exxon Corp./ Reliance Electric Co. Exxon is engaged in the exploration, production, and
14. Eaton Corp./ Cutler-Hammer Inc. Eaton is engaged in technologically related businesses
transportation of crude oil and natural gas; and the production and transportation of petroleum and chemicals. Reliance develop, manufacture, and servicing a broad line of industrial equipment, including electric motors and drives, mechanical power transmission components, industrial and retail scales and weighing systems, and telecommunications equipment
16. Fairchild Industries / VSI Corp. Fairchild produces military aircraft and parts, commercial aircraft and parts, spacecraft and parts,
and domestic communications systems. VSI is a diversified manufacturer of a wide range of precision metal products (including fastening systems for aircraft and missiles, steel mod bases for the plastics industry, door knobs, stainless steel cabinets, and building hardware.
17. Fluor Corp./ St. Joe Minerals Corp. Fluor designs, engineers, procures and constructs complex manufacturing plants, processing plants, and related facilities for energy, natural resources and industrial clients. St. Joe is a diversified producer of natural resources (principally coal, lead, gold, oil and gas, zinc, silver and
iron ore).
18. Fort Howard Paper Co./ Maryland Cup Corp. Fort Howard manufactures a broad line of disposable sanitary paper products, principally table napkins, paper towels, toilet tissue, industrial and automotive wipes, and boxed facial tissues. Maryland Cup manufactures a variety of single use paper and plastic products for food and beverage service, including plates, cups, bowls, cutlery, cirinking straws and toothpicks.
Post-merger corporate performance
page 3 7
19. Freeport Minerals Co./ McMoran Oil Gas Co. Freeport Minerals is a diversified company engaged in exploration and development of natural resources, including agricultural minerals, oil and gas, uranium, oxide and kaolin. McMoran is engaged in the acquisition, exploration and development of oil and gas properties, and the production and sale of oil and natural gas.
&
20. Gannett Co. Inc./ Combined Communications Corp Gannett and its subsidiaries publish daily newspapers. Combined Communications Corporation is engaged in television and radio broadcasting, outdoor advertising and newspaper publishing.
.
21. General Foods Corp./ Oscar Mayer & Co. Inc. General Foods is a leading processor of packaged grocery products. Oscar Mayer operates the meat packing and processing industry.
in
22. Genstar Ltd./ Flintkote Co. Genstar manufactures building materials and cement, and is engaged in housing and land development, construction, marine transportation, financial services, and venture capital investment Flintkote is engaged in mining, and manufactures various building and construction materials, including gypsum wallboard, floor tile, sand and gravel products, concrete, cement and various Ume products.
23. Gulf & Western Industries / Simmons Co. Gulf and Western is a conglomerate with interests
in the manufacture of automotive and airconditioning components, paper products, leisure, financial services, automotive replacement parts, consumer products sugar growing and processing, citrus farming, natural resources, and apparel. Simmons produces furnishings for home, commercial and institutional customers.
24. Harris Corp./ Lanier Business Products Inc. Harris designs and produces voice and video communication, and information processing systems, equipment, and components. Lanier develops, manufactures, and services a broad line of dictating equipment, several models of video-display text-editing typewriters, and small business computers. 25. Holiday Inns Inc./ Harrahs Holiday Inns owns and operates hotels throughout the world.
Harrahs operates two luxury
hotel/casinos.
26. Intemorth Inc./ Belco Petroleum Corp.
Intemorth owns and operates natural gas businesses; produces, transports, and markets liquid fuels and petrochemicals; and is involved in the exploration and production of oil and gas. Belco is engaged in the exploration and production of crude oil and natural gas, and the production of
coal.
27. Kroger Inc./ Dillon
Com panies Inc.
food through supermarkets and convenience stores.
Kroger operates the country's second largest supermarket chain; manufactures and processes food for sale by these supermarkets; and operates one of the country's largest drugstore chains.
Dillon
distributes retail
28. Litton Industries / Itek Corp. Litton produces advanced electronics products for defense, industrial automation and geophysical
Post-merger corporate performance
page 38
markets. Itek develops and manufactures a variety of aerial reconnaissance and surveillance products based on optical and electronic technologies.
29. LTV Orgyp R gpy flJg Stggl LTV and Republic are respectively
/
the nation's third and seventh largest steel producers.
in the exploration and production of and natural gas liquids; pipeline transportation of natural gas liquids and anhydrous ammonia; and marketing natural gas liquids, refined petroleum products, domestic and foreign crude oil, and liquid fertilizers. Earth Resources is a diversified energy and resources development company engaged primarily in refining, transporting and marketing petroleum
30. Mapco Inc./ Earth Resources Company Mapco is a diversified energy company principally engaged
coal, oil, natural gas,
products.
31. McGraw-Edison Co./ Studebaker Worthington Inc. McGraw-Edison manufactures and distributes products
electrical appliances, tools and other products for the consumer market; px>wer system and related equipment for electrical utilities and industry; and a wide range of services and equipment for industrial and commercial uses. Studebaker Worthington's business operations are the manufacture of process equipment and
industrial products.
32. Motorola Inc./ Four-Phase Systems Inc. Motorola produces data communication equipment and systems, semiconductors, and other high technology electronic equipment. Four-Phase produces clustered video display computer systems for distributed data processing applications.
33. Morton-Norwich Products / Thiokol Corporation Morton-Norwich produces salt for domestic and industrial uses, household cleaning and laundry products, and specialty chemicals. Thiokol manufactures specialty chemical products, and propulsion and ordnance products and services for the government
34. Occidental Petrole um / Cities Service Companv Occidental produces and markets crude oil and coal, and manufactures industrial chemicals and plastics, metal finishes, agricultural chemicals, and fertilizers. Cities Service is an integrated oil
company.
35. Pan Am Corp./ National Airlines Inc. Pan Am is a commercial air carrier providing territories and possessions, and 58 cities in 43
services to ten cities in the United States, its foreign countries. National Airlines provides
scheduled
air transportation
Miami,
to
New York, San Francisco and Los
of persons, property and mail over routes extending from its hub in Angeles, and transatlantic service to London, Paris,
Frankfurt and Amsterdam.
36. Penn Central Corp./ GK Technolo gies Penn Central is a diversified company
Inc.
whose primary businesses include oil refining, transporting and marketing refined petroleum products and crude, real estate development, Technologies produces operating amusement parks, and producing offshore drilling rigs. wire and cable primarily for the telecommunications industry, electronic components, and provides engineering services for weapons systems and environmental products.
General American Oil of Texas
a fully integrated oil
is
Phillips Petroleum
exploration.
is
company engaged
primarily engaged in
in
production, and refining. General American
petroleum exploration, oil and gas production and
38. Raytheon Corp./ Beech Aircraft Corp. Raytheon develops and manufactures electronic systems for government and commercial use. Raytheon is also supplies energy services, manufactures major home appliances, designs and manufactures heavy construction equipment, and publishes textbooks. Beech Aircraft designs, manufactures, and sells airplanes for the general aviation market. Beech is also a substantial aerospace contractor producing a variety of military aircraft, missile targets, and cryogenics
systems for aerospace vehicles.
39. Revlon Inc./ Technicon Corp. Revlon is in the beauty products and health products and service business. Technicon designs and produces automated testing systems for blood and other biological fluids, chemical reagents and consumables, industrial analytical instruments, and medical information systems.
40. R.J. Revnolds Corp./
Del Monte Corp.
and international manufacture and sale of tobacco products, transportation (container size freight transportation systems carrying general cargo), energy (oil and gas products), food and beverage products, and aluminum products and packaging. Del Monte's principal business is in food products (primarily processed foods, and fresh fruit), and related services (including transportation, and institutional services).
R.J. Reynolds' lines of business are the domestic
41. Si gnal
Companies
/
Wheelabrator Frye
Inc.
Signal is a diversified, technology -based company which manufactures aerospace equipment, professional audio-video systems, and heavy trucks. Wheelabrator Frye's products and services include environmental, energy and engineered products and services, and chemical and specialty products.
42. Smithkline Corp./
Beckman
Instruments Inc.
Smithkline researches, develops, manufactures, and markets ethical drugs, proprietary medicines, animal health products, ethical and proprietary eye care products, and ultrasonic and electronic instruments. Beckman is an international manufacturer of laboratory analytical instruments and related chemical products that are used widely in medicine and science, and in a broad range of industrial applications.
43. Sohio
/ Kennecott Corp. Sohio is an integrated petroleum company engaged in all phases of the petroleum business. Kennecott produces copper, gold, silver, molybdenum and lead; manufactures industrial abrasive and resistant materials; manufactures and markets industrial engineered systems; and owns twothirds of a Canadian producer of titanium dioxide slag, high purity iron, and iron powders.
44. Standard Brands /Nabisco Inc.
a manufacturer and marketer of food products (specializing in cookies and crackers), pharmaceuticals, and household accessories. Standard Brands is a manufacturer, processor and distributor of food and related products.
Nabisco
is
toiletries,
Post-merger corporate performance
45. Tenneco / Houston Oil & Minerals Corp The major businesses of Tenneco are integrated
.
page 40
oil and gas operations, natural gas pip)elines, construction and farm equipment, automotive components, shipbuilding, chemicals, packaging, agriculture and land management, and life insurance. The recent business emphasis of Houston Oil Minerals has been on the exploration for oil and natural gas on undeveloped properties, and the development of production upon discovery.
&
Tosco Corp/ ATT, Resources Inc. Tosco owns and operates petroleum refineries and related wholesale distribution facilities. AZL has been in the process of changing its focus from agricultural-based businesses to oil and gas
46.
exploration and production.
47. U.S. Steel / Marathon Oil Co. U.S. Steel's principal business include steel, chemicals, resource development, fabricating and engineering, and transportation. Marathon is an integrated petroleum company engaged in the
production, refining, and transportation of crude
oil,
natural gas and petroleum products
48. United Technologies / Carrier Corp United Technologies designs and produces high-technology power systems, flight systems, and industrial products and services. Carrier's principal business is the manufacture and sale of air
conditioning equipment
Westinghouse Electric / Teleprompter Corp. Westinghouse Electric is a diversified corporation primarily engaged in the manufacture and sale of electrical equipment. Westinghouse's wholly owned subsidiary operates six TV stations, 12 radio stations, and cable television systems. Teleprompter is nation's largest cable television company, and owns MUZAC, the leading supplier of music to offices and other commercial establishments.
49.
WBC
Companies / Northwest Energy Company Williams is primarily engaged in the chemical fertilizer, energy and metals businesses. Northwest is primarily engaged in interstate natural gas transmission, oil and gas exploration, and
50. Williams