Are M&A Markets Efficient?: Examining Factors that Predict Whether Firms are Acquirers or Targets

P.A. Mudde (USA)


Acquisition Likelihood, Strategy, Efficiency, M&A Markets


This paper examines the efficiency of M&A markets by exploring how a firm's profitability, efficiency, strategy, and size affects its likelihood of being involved in M&A activity as either an acquirer or a target. It discusses theory from the perspective of finance and economic research which tends to emphasize the role of firm profitability and efficiency in shaping acquisition activity and strategy research which tends to emphasize the role of strategy and capabilities in shaping acquisition activity. We test the significance of firm profitability, efficiency, strategy, and size in affecting the likelihood of a firm being acquired or making an acquisition. The results show that firms that are most likely to make acquisitions are not necessarily the most capable acquirers. In fact, firms with mediocre levels of efficiency are the most likely acquirers, despite the fact that high levels of efficiency are associated with improvements in post-acquisition performance. The results also show a curvilinear relationship between efficiency and size in predicting which firms are most likely to be acquired. We conclude that M&A markets are primarily driven by strategic forces rather than forces of natural selection as argued by the market for corporate control.

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