The Impact of Acquisitions on Corporate Performance Results during the Period of Economic Slowdown: Case of Lithuania

Ausrine Lakstutiene

Abstract


Purpose. Value created by acquisitions and the impact of this process on performance results of a company is one of the topics widely discussed in the scientific literature since the acquisition of a company is one of the strategic development decisions and is ambiguously seen as a mean of company’s growth. Acquisitions are especially beneficial during the economic slowdown as likelihood to overpay for the assets reduces. Moreover, an acquisition enables elimination of the competitive threats and allows adapting of company’s resources and capacities to rapidly changing environment what is especially important when economy goes down. Since corporate acquisitions in Lithuania are not as frequent and accustomed as in other countries, there is a lack of scientific researches evaluating the impact of this process on corporate performance results using different evaluation methodologies. Therefore, the purpose of this paper is to evaluate the impact of acquisitions on the company’s profitability and economic value added during the period of economic slowdown.

Methodology. We apply the methodology based on the data from financial statements. In order to evaluate the impact of acquisitions on corporate performance results, the financial data of Lithuanian companies listed in the NASDAQ OMX Vilnius Stock Exchange were used on following conditions: a company made at least one acquisition during the period of 2008 – 2010 and used a consolidation strategy (as identified by Scherer and Ross, Dutz and others authors, this strategy is more successful during a recession if compared to diversification strategy). Pursuant to Chatterjess and Meeks, Sharma and Ho, Bruner, Wan and other authors, the profitability ratios and economic value added (EVA) were used in our research; the indicators were calculated quarterly and we evaluated their changes in the short term, i.e., one year before and after the acquisition. The calculations of EVA in this case are based on past data; the forecast is not needed, so the results of the economic benefits generated by a company in each period can be considered as accurate.

Results. The estimation of the return based on data from financial statements confirms the results of other researches: we found that the profitability ratios of the most companies went down after an acquisition or improved only slightly; however the return on assets increases during the first quarter after an acquisition. The valuation of EVA evidenced that this indicator increases during the corporate acquisitions if compared with the prior quarter; however we found that EVA tended to decline in the third quarter after the acquisition which also confirms findings of other researchers.

The theoretical contribution. As there is a lack of scientific researches evaluating the impact of corporate acquisitions on performance results of a company, the paper will partially fill this gap.

Practical implications. The obtained results evidence that the acquisitions impact performance of the companies; however since this effect is negative rather than positive in the short term, a company should assess a longer period of time and apply more evaluation methods before taking such a decision.

Keywords: economic slowdown, corporate acquisitions, profitability ratios, economic value added.

Paper type: Research paper.


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