The Impact of Mergers and Acquisitions on Firm Performance: Evidence from the Pharmaceutical Industry

Abstract

The recent past has witnessed a significant increase in mergers and acquisition activity. Firms mainly engage in mergers to achieve corporate growth and realise their business strategy. Mergers and Acquisitions has been a popular strategy among companies, but however they may not always improve firm performance. Various theoretical and empirical studies have been conducted to measure the impact of mergers and acquisitions. Theoretically mergers and acquisitions have shown to improve company performance due to diversification, synergy gains, economies of scale and various other factors. Empirically accounting based studies and stock market event based studies have all reached varied conclusions showing positive to negative to no impact on company performance. In light of the above, the main aim of this dissertation is to analyze the impact of mergers and acquisitions on the operating performance of firms in the US pharmaceutical industry during the period 2004-2008. The pharmaceutical industry has been undergoing significant transformation since the 1990’s, and companies in the industry widely engage in mergers and acquisitions to achieve synergies and overcome competitive pressures. This research tries to highlight the rationale behind the mergers and acquisitions in the pharmaceutical industry as well as tests the effects of these mergers on firm performance. The study mainly employs the accounting based method to evaluate the returns from M&A. Operating performance is assessed in terms of profitability which is measured using key financial ratios. The first study compares pre and post merger performance using a simple paired sample ‘t’ test, while the second study compares merged and non merged firms using a more advanced multivariate regression analysis. The results of both the studies suggest that in the US pharmaceutical industry, mergers and acquisitions have a negative effect on the wealth creation for shareholders of the firm