The Impact of Pre-event Performance of Transaction Participants on the Success of Strategic M&A

Strategic mergers and acquisitions (M&A) are pivotal mechanisms through which organizations achieve growth, diversification, and market expansion. Despite the prevalence of M&A transactions, the complex relationship between pre-event performance and the success of these strategic actions remains underexplored. This study aims to clarify the impact of pre-event performance metrics of both acquiring and target firms on the success of M&A transactions. We conducted an extensive review of existing literature to establish a theoretical foundation, subsequently identifying key hypotheses for both acquirer and target firms. Utilizing cumulative abnormal returns (CARs) over various event windows as the measure of M&A success, our analysis evaluated the influence of multiple independent variables. Our findings indicate that for acquiring firms, maintaining a stable return on equity (ROE) is crucial, as a higher ROE suggests effective management and operation, which can lead to the success of the M&A deal. Additionally, strong growth prospects, exemplified by increasing total revenue, contribute to positive CARs due to investor expectations of synergistic benefits from the merger. For target firms, the study highlights the importance of control of the debt-to-equity ratio. A high debt-to-equity ratio is perceived as indicator of higher financial risk, complicating the M&A process and leading to negative abnormal returns. Overall, this research highlights the significance of pre-event performance metrics, offering valuable insights for both acquiring and target firms aiming to optimize the outcomes of their M&A strategies.