Ownership, Risk and Liquidity: How do UK M&As fare?

A "to be" often ends up in an unpropitious "not to be", is what Merger and Acquisitions (M&As) represent in the world of corporate soliloquy or dialogue. Over decades, M&A remains as a piece of challenging themes for studying financial market, corporate decision, heuristic hubris, risk tolerance, investment behaviour, return predictability and financial contagion. The UK M&As differ from USA events in a number of ways, particularly how the final purchase price of the target firms is adjusted to the weighted market price. The ex-ante and ex-post ownership concentration, risk and liquidity constraints of M&A firms are fascinating portfolio of realistic empirical studies. The global dollar value associated with merger and acquisition (M&A) deal is substantial and drives several contracts for the economic renewal.

But let’s think about ownership, risk and liquidity of UK M&As from a strategic perspective: What do UK M&As tell us? Are they incentive compatible? If so, how much and how do they impact ownership, risk and liquidity?

The broader issue is the lure of M&A, in anticipation of higher market returns, and continuity of capital control. However, the failures of M&As do not tell us if M&As shape market hegemony or succumb to dismal firm performance. Therefore, looking at ownership concentration, risk and liquidity constraints of UK M&As is quite transformational. In particular, while a panel of M&A events are compared with a set of matched firms and targets. What is interesting; prior to M&As take place, acquirers exhibited both lower systematic risk and ownership concentration with contrast to their target firms as well as matched sample of firms. The lower ownership concentration suggests that acquirers are less restricted relative to their matched sample or targets when undertaking M&As or when pursuing managerial self-interests via M&As pathway. Increased ownership concentration offers a greater degree of protection to targets against acquiring shareholders, as the targets have more scope to negotiate agency problem by aligning optimal managerial interests.

Liquidity or readily available cash is correlated to capital formation of firms; however, firms often suffer from a lagged effect of realising this benefit as they incur a higher proportion of debt/leverage to finance their deals. Higher leverage typically occurs due to unused debt-capacity of targets from pre-merger years. In addition, increased leverage adds shareholder value by releasing bondholders' wealth. Mainly because of co-insurance effect, i.e. existing shareholders are better off as the debt turns out to be relatively safer. One of other facts emerges from this review is that the lower systematic risk indicates that availability of more cash flows after mergers, while the lower ownership concentration implies that it may follow from the issue of shares to fund cash deals. From a more conventional point of view, it appears that the profit margins are also higher for merged firms compared with their matched sample, which is both strategic and operational. This suggests every economic effect being equal, the unilateral effect persists; i.e. competition between products of the merged entities is eliminated. This, in turn delivers market-adjusted return to the merged entity. Essentially, this justifies reduced liquidity constraints of UK M&As.

So, where are we now! Despite several contrasting views about the value creation of M&As, it is highly predictable that the post-event M&As could potentially reduce liquidity constraint of firms. Similarly, both the risk and ownership concentration are more likely to decrease than their pre-event years.

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