Finance

INTRODUCTION
Background
Mergers and acquisitions are pervasive occurrences. Estimates by the International Labour Organization indicate that each year there are close to 4,000 mergers and acquisitions which are carried out (ILO, 2001). According to the United Nations Commission on Trade and Development, the past 3 decades have seen a 40 expansion in the total value of mergers and acquisitions globally. There were a total of 24,000 mergers and acquisitions which generated more than 2.3 trillion as at the beginning of 2000 (UNCTAD, 2008).

In corporate mergers, two or more different firms join together to create a single entity. On the other hand, one larger firm absorbs another smaller one in acquisitions. The management and or assets of the less dominant firm are taken over by the more dominant one in acquisitions and there is no physical consolidation of the 2 companies. Three different types of mergers have been described and these are horizontal, vertical and conglomerate mergers. In horizontal mergers, there is the union of 2 or more firms which have similar distribution and production activities or which deal in the same kinds of businesses. In contrast, vertical mergers entail the union of 2 or more firms which have very different production and or distribution activities and which take part in very different businesses. The normative characteristic that is inherent in vertical mergers is that the businesses involved have a pre-existing buyer-seller relationship (Kargin, 2001 Agrawal, Jaffe  Mandelker 1992).

Like vertical mergers, conglomerate mergers involve the marriage of firms which are engaged in businesses that are in no way related. According to studies, conglomerate mergers are more prone to failure than non-conglomerate mergers. This relatively high failure rate has been attributed to among others the fact that the acquirers are usually not very well acquainted with the operations of the target companies and the prevailing complexities inherent in the industry in which the target firms operate. Additionally, acquiring firms usually spend more free cash flow on the target firms, making generally unattractive purchases during conglomerate mergers (Kargin, 2001 Agrawal, Jaffe  Mandelker 1992 Mandelker 1974).

There is a blatant geographical bias in mergers and acquisitions activity, with most of these transactions occurring in the developed nations of Europe and North America and to a lesser in the Caribbean and Latin America. The merger and acquisition activity in Asia, Africa and South America is nominal. Besides the seeming geographical clustering, merger and acquisition activity is seen often in certain industries than in others. There is a disproportionately higher merger and acquisition activity in the banking and finance, ICT, and agrochemical industries (Buehlens, 2008). Mahheswari (2002 p.37) and Sirower (2000 p.52) further identify high levels of mergers and acquisitions in the cement, steel, auto, textiles, and pharmaceuticals and aluminium industries.

There has been a substantial merger and acquisition activity in the US. According to Dykema (2007) and Uhrig (2008), the total value of mergers and acquisitions in the United States in 2007 alone stood at nearly 2 trillion and these were primarily attributed to the availability of many strategic buyers and inexpensive credit, high interest from buyers in other countries in particular European nations and China, and stronger balance sheets. In 2000 for instance, the US accounted for 50 of all mergers and acquisitions which were worth an estimated 3.2 trillion. A cursory look at merger and acquisition activity the world over reveals that these activities have been, generally, on an upward trend over the past 3 decades (Buehlens, 2008).

This trend has been attributed to several reasons. First, firms engage in mergers and acquisitions as a means of maximization of shareholder wealth and profits (Gugler, Mueller, Yurtoglu  Zulehner 2001 p.626). Secondly, mergers and acquisitions are carried out by firms in order to enable them achieve economies of scale (Devereux  Johnson 2006). According to Manne (1965) and Jensen  Ruback (1983), companies may engage in mergers and acquisitions with the objective of staking corporate control. Ravenscraft  Scherer (1988) and Weston (1994) explain that a key driver of many mergers and acquisitions is the quest to dispose the target firm in bits. Further, tax reduction and high cash reserves or low debt levels in the target company have also been cited as reasons behind mergers and acquisitions (Gilson, Scholes  Wolfson, 1988 King, 1987 Morck, Shliefer and Vishny 1988). Changes in technology, globalization, market deregulation and liberalization have also been cited as key drivers of mergers and acquisitions (Mallikarjunappa  Nayak, 2007).

As indicated, the profit motive has been cited as one of the main reasons which drive merger and acquisition activity. However, Baumol (1959) Marris (1964) and Mueller (1969) posit that mergers and acquisitions are primarily tools which are utilized by managers in order to attain specific growth objectives and not necessarily maximization of profit. Grossman and Hart (1980) explains that some managers use mergers and acquisitions in order to make the management of the firm become more complex and this is done so as to discourage shareholders from assiduously assessing how the firm is being managed. To enhance the value of a firm and prevent the payment of cash reserves to the firms owners, companies with free cash flows may take part in mergers and acquisitions (Jensen, 1986).

Raj  Forsyth (2002) and Jensen and Ruback (1983) studied merger and acquisitions and explain that 4 theories exist to explain why firms take part in mergers and acquisitions. These theories are the synergistic theory, the disciplinary theory, the undervaluation theory and the hubris theory. The synergistic theory states that companies engage in mergers and acquisitions in order to achieve higher efficiency levels since they attain greater synergies when combined together than when they are not combined. The disciplinary theory posits that companies which under perform are likely targets for hostile takeovers. Hubris is witnessed whenever managers of the acquiring firm pay much more for the target firm, largely because they have overestimated their abilities to manage it (Buehlens, 2008 Wang, 2007).

Many other reasons have been advanced to explain why mergers and acquisitions remain popular the world over. They include the desire to overcome competition, enhance revenues, enter and penetrate a particular market or market segment, attain economies of scope and scale, achieve greater cost efficiencies, enhance the human resource capacity, attain savings on corporate tax, enhance the research capacity and eliminate mediocrity  (Buehlens, 2008 Mallikarjunappa  Nayak, 2007).

From the foregoing, it is evident that mergers and acquisitions are powerful tools that can help a company leverage its competitive edge and easily attain its strategic intents.  However, mergers and acquisitions have been associated with many other disadvantages the most obvious of which is massive staff lay offs and redundancies.  There has been a high failure rate of mergers and acquisitions all over the world and these have been associated with declining profits, lower shareholder wealth and suboptimal employment levels. According to Schweiger (2003) between 50 and 75 of all mergers and acquisitions do not live up to the expectations of the companies involved. Where positive outcomes are seen, it is the target company which usually gets most of the benefits (Mallikarjunappa  Panduranga, 2007).

This thesis examines the impact of mergers and acquisitions on US companies between 2000 and 2006 in order to determine whether they helped in the creation of value. The role of corporate governance in the companies is equally examined in order to determine its impact on the success of the merger and acquisition.

Problem statement
Mergers and acquisitions are very popular occurrences the world over. Research indicates that most mergers are unsuccessful and lead to losses especially for shareholder of acquiring companies. Mergers and acquisitions are also associated with declining profitability in many instances. Whereas many studies have investigated the impacts of mergers and acquisitions and whether they create value for the companies involved, many of these studies are old and the number of studies assessing the utility of mergers and acquisitions which were carried out in the past 8 years in the US are very few. The old studies cannot be entirely applicable in the present as several studies have demonstrated different outcomes based on the period of time within which the merger and acquisition activity was carried out. Therefore, there is need to carry out a study which evaluates recent mergers and acquisitions in order to conclusively determine whether there was any value created by recent mergers and acquisitions.

Purpose statement
The main purpose of this study was to determine whether mergers and acquisitions in the U.S create value to the firms involved in the transactions

Aims and objectives
Aim 1
To determine the impact on shareholder wealth of mergers and acquisitions in the US between the period 2000 and 2006

Objective 1.1
To calculate the mean announcement-period cumulative abnormal returns (CAAR) for companies involved in mergers and acquisitions in the U.S and compare this with the pre-merger value of stocks for both acquiring and target companies

Objective 1.2
To carry out multivariate regression in order to determine whether there is a statistically significant difference between the CAAR of acquiring and the target companies before and after the merger or acquisition

Aim 2
To determine the impact on profitability of mergers and acquisitions on companies in the US between the period 2000 and 2006

Objective 2.1
To determine the earnings before income tax (EBIT), return on investment (ROA), Tobins Q and leverage of the companies before and after the merger and acquisition

Objective 2.2
To carry out multivariate regression in order to determine whether there is a statistically significant difference between the profitability of acquiring and target companies before and after the merger or acquisition

Hypotheses
Alternate hypothesis 1(H0)1
There is a statistically significant difference between the CAAR of target companies in the US before and after a merger or acquisition

Null hypothesis 1
There is no statistically significant difference between the CAAR of target companies in the US before and after a merger or acquisition

Alternate hypothesis 2 (H0)2
There is no statistically significant difference between the CAAR of acquiring companies in the US before and after a merger or acquisition

Null hypothesis 2
There is a statistically significant difference between the CAAR of target companies in the US before and after a merger or acquisition

Alternate hypothesis 3(H0)3
There is a statistically significant difference between the profitability of target companies in the US before and after a merger or acquisition

Null hypothesis 3
There is no statistically significant difference between the profitability of target companies in the US before and after a merger or acquisition

Alternate hypothesis 4(H0)4
There is no statistically significant difference between the profitability of acquiring companies in the US before and after a merger or acquisition

Null hypothesis 4
There is a statistically significant difference between the profitability of acquiring companies in the US before and after a merger or acquisition

Definitions
The following definitions will be applicable in this study

Asset mergers
Asset mergers will be used to describe a situation where one firm buys just a portion of another firms assets (GAO, 2008)

Corporate merger
Corporate mergers will define a situation where one company purchases all the shares and assets of another company to create a single entity (GAO, 2008)

Cumulative abnormal average returns (CAAR)
CAAR will be defined as the sum of the differences between the actual return and the expected return. The expected return will be calculated by multiplying the systematic risk with the product of the realized market return.

Hostile and friendly takeovers
A hostile takeover will describe a situation whereby a dominant company assumes the ownership of a less dominant company without the express will of the less dominant companys management. Where the dominant company assumes ownership of the less dominant company after having obtained approval from the management of the less dominant company, the situation will be referred to as a friendly takeover.

Scope, limitations and delimitations
The scope of this research was limited to the study of mergers carried out between 2000 and 2006 in the US. A number of limitations were encountered and these included insufficient time, financial constraints, scarcity of literature and drawbacks related to the selected study design. With regard to delimitations, the inadequate time constrained the investigator to make do with a small sample size which could be effectively handled within the available time and this had the effect of reducing the validity of the study. Scarcity of recent literature also affected the research since this was a Meta analysis and the success of the research depended on obtaining a large sample of studies in order to enable the researcher to come up with well reasoned and representative outcomes. Thus, the scarcity of data reduced the sample size.

Due to financial constraints, the investigator was unable to subscribe to premium content journals and databases to access the latest studies from authoritative figures. This could have introduced selection bias into the study and could have negatively affected the validity of this research. As pertains to the drawbacks related to the study design, the stringent inclusion and exclusion criteria also limited the number of available samples. Besides, the Meta analysis approach has been faulted for incorporating blemished studies which end up distorting the outcomes obtained. It is also possible that the investigator may have failed to identify null and negative results which may have been inherent in the studies which the investigator evaluated. Additionally, the evaluations made are largely associative and this may have weakened the conclusions. Finally, a small element of subjective bias may have been introduced into the study since comparisons of different studies rely on the interpretation by the investigator.

Organization of the thesis
This thesis has been divided into 6 chapters. Chapter 1 is the introduction chapter and is followed by chapter 2 which reviews literature associated with mergers and acquisitions in the US. The methodology used in this study is presented in chapter 3 while chapter 4 is the findings and data analysis section. This is followed by chapter 5 which is the discussion chapter and finally chapter 6 which is the conclusion and recommendations chapter.

CHAPTER 2 LITERATURE REVIEW
Introduction
Many studies have been carried out in order to determine the effect of mergers and acquisition on the performance of the companies involved. Creation of value following mergers and acquisition has been ascertained by assessing the announcement period abnormal return as a measure of shareholder wealth and by assessing the profitability of the firms involved in the acquisition or merger. Studies have also assessed the post acquisition employment levels, evaluating the impact of these activities on employee retention.

This section reviews studies which have been conducted on mergers and acquisitions in the US. First though, a global perspective of mergers and acquisitions is presented and the concept and occurrence of merger waves, with a particular reference to the US, delineated. Factors associated with merger failures and the utility of both accounting and event studies are also considered. The main purpose behind all these is to critically analyze all the factors associated with merger and acquisition activity in the US, identify all the studies on the effect of these activities in US firms and determine exactly how the shareholder wealth and profitability has been affected. This will help answer the main question in this study on whether mergers and acquisitions lead to the creation of value.

Global Merger and Acquisition Activity
According to Buehlens (2009), there has been an exponential increase in the number of deals relating to mergers and acquisitions worldwide since 1992. Rising from a low of nearly 15,000 deals in 1992, merger and acquisition activity peaked in 2000 with nearly 40,000 deals being transacted. In the US however, the peak was reached in 1998. There was a marginal decline in the 2 years that followed before the next peak was observed in 2006 (figure 1 below).
Figure  SEQ Figure  ARABIC 1 Global merger and acquisition activity between 1982 and 2006

Source Buehlens (2008)

At the same time, the total value of merges and acquisitions rose from nearly 250 billion euros in 1992 to an all time high of 4 trillion euros in 2000. Subsequently, the total value declined with each successive year, bottoming out in 2003 before ascending again to hit about 2.8 trillion euros in 2006. This is represented in figure 1 above. As can be seen, a new merger wave begun in 2003 but this wave has been associated with relatively lower values.

As figures 2 and 3 below shows, the contribution of Asian firms in merger and acquisition activity has increased in recent years. Nevertheless, the cumulative value of the Asian contribution is stills small. The US has surpassed the EU and now contributes the most to the total merger and acquisition activity in terms of deals and value (Buehlens, 2008).

Figure  SEQ Figure  ARABIC 2 Regional distribution of merger and acquisition activities by target between 2000 and 2006

Source Buehlens (2008)

Figure  SEQ Figure  ARABIC 3 Regional distribution by acquirer region between 2000 and 2006

Source Buehlens, 2008

Mergers and Acquisitions by Sector

Figure 4 below depicts the distribution of merger and acquisition activity in the US between 2000 and 2006 by sector. As can be seen, majority of transactions involved companies in the services sector. Together with the manufacturing sector, the services sector contributed more than half of all the merger and acquisition deals. Deals attributable to companies in the finance and real estate sector formed more than 16 of the total transactions. At the bottom end were deals by network, distribution and extractive industrial and construction industries in that order (Buehlens, 2008).

Figure  SEQ Figure  ARABIC 4 Distribution of Merger and Acquisition Activity in the US by Sector (2000-2006)

Source Buehlens (2008)

In the US petroleum industry 1,088 mergers took place between 2000 and 2007 (GAO, 2008). Trends in this industry over the period indicate that there was a general rise in the number of mergers and acquisitions every year as shown in the figure 4 below. Most of the mergers and acquisitions (about 69) were in the upstream segment. The rest took place in the midstream and downstream segments Majority (75) were asset mergers while the remaining 25 were corporate mergers. The mean value for all the mergers totalled nearly 500 million (figure 5 below)

Figure  SEQ Figure  ARABIC 5 Merger and acquisition activity in the US petroleum industry between 2000 and 2006

Source GAO (2008)

Figure  SEQ Figure  ARABIC 6 Mean value of mergers in the US petroleum industry between 2000 and 2006

Source J.S Herold cited in GAO (2008)

Laws regulating merger and acquisitions in the US
The Federal Trade Commission (FTC) is a government body that is mandated to ensure that there is competition among firms across industries by reviewing proposed mergers and acquisitions to determine whether they will diminish competition. In discharge of this mandate, FTC is principally guided by 3 laws which are the Clayton Act, the Hart-Scott-Rodinho Act and the Federal Trade Commission (FTC) Act.

The Clayton Act was enacted in 1914 and forbids any merger or acquisition which may lead to elimination of competition between companies in any sector and which may result in a monopoly. The Celler-Kefauver Act sought to amend section 7 of the Clayton Act so as to better regulate mergers and acquisitions. The Federal Trade Commission Act forbids the use of unfair practices in trade. Finally, the Hart - Scott Rodinho Act contains an amendment to section 7A of the Clayton Act and establishes waiting requirements and pre-merger notification for any individual or firm seeking to make an acquisition or take part in a merger. Amended in 2001, the law increased the threshold for statutory sizes and transaction amounts

Merger waves
According to ILO (2001), merger waves are durations of intense merger activity. The United States has had several merger waves since 1897. The first ever documented merger wave in the country took place at the end of the nineteenth century and continued until 1905. This wave arose as a result of a bullish stock market and the enactment of the Sherman Antitrust Act. According to Owen (2006), the act led to the creation of monopolies and as Sudarsaman (2003) asserts, led to the dissolution of more than 2,000 firms and the creation of about 70 monopolies.

The second merger wave to hit the United States was witnessed in 1916 and continued until 1929. This particular wave arose as a result of the 1914 Clayton Act and was enhanced by a buoyant stock market and the availability of equity.  Enactment of the Celler-Kefauver Act helped to limit merger waves and the next wave was observed almost 4 decades after the end of the second wave. This third wave took place between 1965 and 1969 and was largely attributed to a bullish stock market and a resurgent economy. Merger and acquisition activity was largely driven by the availability of excess liquidity and the preference by firms to buy out other companies rather than to give out money to their shareholders. As the Celler-Kefauver Act was largely against horizontal mergers, conglomerate mergers were observed mostly and very few hostile takeovers were carried out. The wave ended due to the oil crisis in the early seventies (Melicher, Ledolter,  DAntonio, 1983 Kolasky, n.d).

The fourth wave hit the country in 1984 and persisted until 1989 (ILO, 2001). Compared to the earlier waves, this was the biggest of them all and was characterized by a large number of hostile takeovers. The wave arose because of wide availability of debt financing, poor management of many companies, rapid specialization of firms and the government move to remove a number of controls limiting mergers and acquisitions.

There was yet another big merger which occurred in the nineties. Larger in scope and characterized by very few horizontal mergers, this particular wave featured a large number of friendly takeovers. According to Owen (2006) close to 95 of all the mergers witnessed were friendly takeovers and the main medium of exchange was stocks.

Studies on the economic impacts of mergers and acquisitions
The economic impact of merger and acquisition can be studied using share price data or studies of profits. The main objective of studies which use share price data is to analyze how the gains or losses to shares following the merger and or acquisition activity are distributed among the shareholders. These studies are often based on event study methodologies and the data used is associated with specific announcement periods. A number of studies which utilized share price data in order to evaluate whether mergers and acquisitions create value have been documented.  Majority of the studies show that the value of shareholder wealth of target companies is increased following mergers and acquisitions. On the other hand, there is a general decrease in the wealth of shareholders of the acquiring firms.

Using daily data of 196 companies, Asquith (1983) looked at the performance of companies which had taken part in mergers and acquisitions between 1962 and 1976. Results of this study showed that acquiring firms achieve positive returns 16 and 8 months before and after the merger announcement respectively. Their results also show that after these periods have elapsed, the companies attain negative returns which further decline 90 days after the end of the specified duration.

Dodd  Ruback (1977) found out that acquiring companies generally have reduced returns in the post acquisition period. According to their studies, such firms had a mean CAAR of -0.0591. Even so, the t-statistic was not significant. Their results also suggest that shareholders of target companies generally attain huge gains in their stocks, the mean of which is 20.58 for successful transactions. On average, their stocks also rise by nearly 19 for transactions which are not successful. Lagetieg (1978) assessed 149 mergers which involved firms listed in the New York Stock Exchange (NYSE). Their findings show that acquiring companies have large negative returns. These findings were corroborated by the study carried out by Malatesta (1983). In his study, Malatesta assessed 256 acquiring firms which took part in mergers and acquisitions for a period of 5 years beginning in 1969. As their results show, acquiring firms in the US generally have negative returns during the post acquisition period.

Dodd (1980) utilized the market model to evaluate 150 merger proposals made between 1970 and 1977 and discovered that shareholders of target firms benefit greatly on the day prior to the announcement and on the day when the actual announcement is made. On the day before the announcement, he found out that the stocks of shareholders of the target firms increased by up to 4.3. On the actual announcement day, the stocks of the shareholders of the target firm rose by 8.74.
Yet another study which demonstrated negative returns for acquiring firms in the post acquisition period was carried out by Magenheim  Mueller (1988). Besides demonstrating negative returns for the acquiring companies, their results also show that acquiring firms benefit more from tender offers than they do for mergers and acquisitions. Similar findings are reported by Bradley and Jarrell (1988). Negative returns for acquiring companies in the post acquisition period are also reported by Franks, Harris and Mayer (1988) who looked at 519 firms which took part in mergers and acquisitions in the US between 1955 and 1984.

Similarly, Frank, Harris and Titman (1991) evaluated 399 mergers and tender offers which were carried out for a 9 year period beginning in 1975. Their findings are consistent with other results as they show negative returns for acquiring companies and positive gains averaging 28 for shareholders of target firms.

A 10 decline in the value of shares of acquiring companies within the initial 5 years of the acquisition period was demonstrated by Agrawal, Jaffe and Mandelker (1992). They carried out a 32 year study and evaluated 1,164 samples. Whereas the shareholders experienced huge losses during the entire study period, the losses were more pronounced for transactions which were carried out before 1975 and after 1979. Even though the findings of the study by Loderer  Martins (1992) were not statistically significant, they pointed towards the same trend indicating large negative returns for shareholders of acquiring companies and positive returns for shareholders of target companies in the US. Their conclusion however is that shareholders of acquiring companies do not gain nor lose during mergers and acquisitions.

Jensen  Ruback (1993) records average gains of 17 to 34 for shareholders of target companies one month after the transaction. Loughran  Vijh (1997) utilized the buy-and-hold return technique of calculating the value of stocks and found out that there are positive gains associated with tender offers while losses are associated with mergers. The bias adjusted cumulative abnormal return (BCAR) method was used by Rau  Vermaelen (1998) to investigate a total of 3,500 mergers and tender offers transacted between 1980 and 1991. Their results show that shareholders attained negative abnormal returns 36 months into the post acquisition period. More recent studies which affirm these outcomes were conducted by Leth  Borg (2000), Mulherin (2000) and Kohers  Kohers (2000), DeLong (2001), and Houston et al (2001).

Studies utilizing profitability make use of accounting data and have also been extensively documented. Whereas there is considerable disagreement on the effect of mergers and acquisitions on the profitability of the companies involved, most studies find that mergers and acquisitions are associated with enhanced profitability of firms in the US. Studies by Healy, Palepu  Ruback (1997), Lev  Mandelkar (1972), and Weston  Masinghka (1971), show that mergers and acquisitions result in enhanced profitability for the firms involved. Results of the study by Healy, Palepu  Rubeck (1997) also demonstrate that hostile takeovers generally result in poorer outcomes than do friendly takeovers. Stated differently, companies which take part in friendly takeovers generally exhibit higher profitability than those which take part in hostile takeovers. However, different results are found by Ravencraft  Scherer (1988). Their results show that firms which take part in mergers and acquisitions generally have reduced profits. These findings corroborate earlier findings obtained from the studies by Mandelker (1974), Smiley (1976) and Ellert (1976).

The impact of Mergers and acquisitions on employment in the US
The effects of mergers and acquisition on employment levels in the United States have been extensively studied by many investigators. In a 7 year study of companies located in Michigan, Medoff (1988) demonstrated a 2 rise in employment levels following mergers. At the same time, their findings indicated that the marginal rise in employment was accompanied an average wage decline of 4. On the other hand, asset mergers were associated with a 5 increase in the average wages. In another study, Bhagat et al (1990) evaluated the impacts of 62 hostile takeovers in the US between 1984 and 1986. Their results show that nearly 6 of the employees of the companies involved the hostile takeovers were declared redundant.

Findings by Lichtenberg  Siegel (1990) indicate that mergers and acquisitions mostly affect central office workers. McGuckin  Nguyen (2000) carried out a decade long study which evaluated the effect of mergers and acquisitions on the employment levels of the US manufacturing industry. Their findings show that mergers and acquisitions are associated with an increase in the number of employees. These findings suggest a positive correlation between merger and acquisition activity and employment. Similar findings were reported by Gugler  Yartoglu (n.d.) who show an increased demand for labour in the post-acquisition period. The positive effect of mergers and acquisitions in the US labour market contrasts sharply with the impact of mergers and acquisitions on the labour markets of many European nations such as the UK. This is because the US has some of the most liberal employment protection laws. According to Arellano  Bond (1991) and Abraham  Houseman (1989), the cost involved in the adjustment of labour markets in the country is relatively small compared to that in these European states.

Factors Associated with the Failure of Mergers
According to estimates, close to a half of all mergers and acquisitions do not succeed. Similar outcomes are presented by Porter who studied 33 Fortune 500 companies involved in acquisitions and concluded that more than a half of these firms were unsuccessful. According to Chandra (2001), mergers and acquisitions are invariably associated with falling productivity and lesser profits. A report by McKinsey (cited in Hubbard, 1999) demonstrates that 75 of companies engaged in mergers and acquisitions are unable to recover the expenses spent in the activity. Reportedly also, the performance indices of more than 50 of the companies which take part in mergers and acquisitions are below those of industry averages. Schweiger (2003) reports that between 5 and 7 out of every 10 companies engaged in mergers and acquisitions fail.

This high failure rate has been attributed to several factors. These factors include hubris (Moeller, Schlingemann  Stulz, 2004 Sundarsaman, Holl  Salami, 1997 Gregory, 1997 Roll, 1986) and poor leadership (Mallikarjunappa  Nayak, 2007). Others are poor communication (Schweiger, 2003), obsession with bigness (Gregory, 1997) Malatesta, 1983), and strict antitrust legislation (Asquith, Brunner  Mullins 1983 Eckbo, 1983 Weir, 1983 Jarrell  Bradley, 1980). Other factors blamed for the high failure rate of mergers are poor strategic fit between the companies involved and lack of focus (Maitra, 1996). Rau  Vermaelen (1998b) explain that acquisitions that are made solely on the basis of glamour rather than value are bound to fail. Unsuitable partners, lack of follow up and lateness in taking over control of the merged firm are also factors associated with failure of mergers and acquisitions (Harihan, 2005 Chakravarty, 1998).

Firms which fail to conduct a due diligence on the target company also exhibit high failure rates as do those which fail to carry out a detailed financial appraisal of the targets (Harihan 2005). Poorly managed integration (Zainulbhai, 2006) and the type of exchange medium that is used also have an effect on the success of mergers and acquisitions. Generally, the use of stocks as a payment medium is associated with greater success than the use of cash Yook, 2000 Asquith, Bruner  Mullins, 1987 Huang  Walkling, 1987 and Travlos, 1987).

Size may also determine whether a particular merger or acquisition will be successful (Hubbard, 1999). Moeller, Schlingenmann  Stulz (2004) asserts that less successful outcomes are obtained with larger companies than with smaller ones. High failure rates are also associated with firms which primarily take part in mergers and acquisitions in order to strengthen their market power (Eckbo (1992 Ravenscraft and Scherer, 1987). Studies by Abyankar, Ho  Zhao (2005), Moeller, Schlingemann  Stulz, (2005) and Variaya  Ferris (1987) also demonstrate that overpayment can lead to the failure of mergers and acquisitions. Further, companies which have no prior experience in mergers and acquisitions have also been shown to have high degrees of failure (Hubbard, 1999).
Diversification of the firms is yet another issue that has profound effect on the success of mergers and acquisitions. According to Sudarsanam (2003) and Dash et al (1987), firms which purchase other companies which are engaged in the same line of business are more successful than those which buy into unrelated businesses. Similarity in organization fit as manifested by comparable human resources, managerial and cultural features is also associated with more successful outcomes (Hubbard, 1999 Jemison  Sitkin, 1986).

Summary of the literature review and gaps in literature
Mergers and acquisitions are accompanied by high failure rates. Most studies which assess the effect of acquisition and merger in the US indicate that shareholders of target firms benefit from higher stock values and hence increase their wealth. On the other hand, the studies show that shareholders of the acquiring companies attain losses in their stock values hence see a decline in their wealth. Additionally, most studies reviewed conclude that mergers and acquisitions enable the target companies to attain increased profitability. Conversely, gains by acquiring companies are quite uncommon. Studies also indicate that mergers and acquisitions have little effect on employment levels in the country and that shareholder returns are slightly positive or break even.

Gaps  more recent data is missing
Statistically significant outcomes are needed
 CHAPTER 3 RESEARCH METHODS
Nature of study
This study was conducted using the Meta analysis approach. Event studies were used to examine the impact on shareholder wealth of mergers and acquisitions.

Why the Meta Analysis Approach Was Chosen
The Meta analysis approach was deemed to be the most suitable research approach for this particular study because of the following reasons

Replication. With Meta analysis, replication of the study by other investigators is entirely possible. Since the study can be easily replicated, the validity and reliability of the conclusions made are enhanced

The meta analysis method enables the investigator to authoritatively evaluate dissimilarities across studies and diminishes the probability of over-interpretation of the differences

The meta analysis approach is suitable because it allows the investigator to discover correlations between different variables, something which may be entirely impossible with other kinds of research methods

Unlike the less tractable record review studies, meta analysis enables the investigator to study huge amounts o data

Event studies
As explained in the literature review chapter, event studies are powerful tools which are primarily used to assess the gains and or losses obtained by shareholders of companies involved in mergers and acquisitions during a specified announcement period.

Why event studies were used
Event studies were preferred over accounting studies for the following reasons Unlike accounting studies which are highly unreliable because they change constantly due to changes in accounting decisions, event studies are more reliable as they are unaffected by such decisions

Event studies are usually premised on larger data sets and therefore offer a more credible approach and allow the generalization of the outcomes obtained

Event studies are largely devoid of measurement errors which encumber many large studies
Event studies are consistent with the meta analysis method chosen for this study as they facilitate the determination of any association between mergers and acquisitions and creation of shareholder value
Event studies primarily assess cumulative abnormal returns of shareholders associated with firms engaging in mergers and or acquisitions. The main objective of this study was to evaluate the impact of these activities on the cumulative abnormal returns and by extension determine whether they are associated with value creation. Evidently therefore, event studies are best suited to fulfil the stated objective

Research questions
What impact have mergers and acquisitions conducted between 2000 and 2006 in the U.S had on shareholder wealth
What impact have mergers and acquisitions carried out between 2000 and 2006 in the U.S had on profitability of the companies involved
Statistical tests
Correlation between the dependent and independent variables was assessed using multivariate regression analysis
Number and description of literature
Source of literature
Securities Data Corporations (SDC) database
IRRC Database
Databases  JSTOR, Sagepub, Gogle Scholar
COMPUSTAT
Snowball technique
Sampling method - Clustered weighted sampling
Inclusion criteria

The following criteria were used to select data for use in this study
only studies reviewing merger and acquisition activity which took place between 2000 and 2006 were considered for this research
only peer reviewed articles were used
the research utilized only those studies which were published in English
the merger and acquisition activity must have taken place in the US or where both the target and acquiring companies are incorporated in the US
Longer period studies were utilized for this research and this was done so as to overcome the effect of differences in time period
Exclusion criteria
Poor quality and incomplete studies were not used in this research
Non-published articles were excluded from this research
Variables
Independent variables
The following independent variables were used in this study

Dependent variables
Shareholder wealth  CAAR
Profitability
ROA
Leverage
Tobins Q
Validity and reliability
Validity
Reliability
Research strategy
Data entry and management
Ms Access
Codebook
Verification of data
Summary