THE MEASUREMENT OF POST‐ACQUISITION PERFORMANCE: TOWARD A VALUE‐BASED BENCHMARKING METHODOLOGY

Mark L. Sirower and Stephen F. O'Byrne

Journal of Applied Corporate Finance, 1998, vol. 11, issue 2, 107-121

Abstract: Mergers and acquisitions are clearly the favorite corporate growth strategy of this generation's executive teams. But there is little evidence that such strategies have paid off for the acquiring companies' shareholders–and many transactions have proved disastrous for the careers of the executives as well as the pocketbooks of the shareholders of the acquiring firms. This article presents a methodology for evaluating post‐acquisition operating performance from the perspective of the acquiring company's shareholders. The cornerstone of the method is a performance benchmark that incorporates the operating performance expectations built into the pre‐acquisition market values of the two companies plus the additional promise of performance created by the payment of an acquisition premium. After illustrating the use of this methodology in the case of an actual acquisition, the article goes on to present the results of a study (using 41 major strategic acquisitions from the period 1979–1990) of the extent to which stock market reactions to acquirers are useful predictors of actual performance over a five‐year period following the acquisition. The results of the study provide strong support for building current market expectations into the benchmarking methodology. The 1990s are often said to have initiated an era of so‐called “strategic” mergers. The clear message from this analysis is that, even if a deal is deemed “strategic,” it will not add value unless the realized synergies justify the acquisition premium. The burden of proof is on the acquirer to demonstrate to the market that they will. This article provides a tool that senior executives can use both for pre‐acquisition analysis and pricing and for post‐acquisition performance evaluation and incentive compensation.

Date: 1998
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