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To Investigate the Cumulative Abnormal Returns for M&A Deals in the Same Industry Vs Cross-industry

Literature Review

Introduction

Mergers are acquisitions (M&A) are the process of consolidation of organisations. The merger represents the combination of two businesses to form one organisation whereas acquisition is the process of a company being taken over and purchased by another enterprise (Alkaraan, 2017).

The intention behind mergers and acquisitions is to create more customer value by forming a single entity compared to the two separate companies (Boloupremo & Ogege, 2019). Mergers and acquisitions are mostly evident across the same industry as the organisations intend to increase their competencies and achieve horizontal and vertical integration.

However, cross-industry mergers and acquisitions have also become normal in contemporary times due to achieving differentiation in the products and services for acquiring a larger customer base (Doukas, et al., 2001). The research topic is to analyse the cumulative abnormal returns for merger and acquisition deals in the same industry compared to cross-industry.

The themes discussed in the literature review has been derived from the research objectives and presented by referring to the secondary sources of information. the literature review analyses the value of diversification motives for mergers and acquisitions and identifies the most common types. An evaluation of the success rate of mergers and acquisitions has been made by considering the same industry and cross-industry followed by identifying the managerial motives and cross-border deals of mergers and acquisitions.

The Types of M&A Deals and The Most Common Type(s)

According to Gaughan (2010), the mergers and acquisition deals include the strategic and financial acquirers wherein the former represents the companies that are direct competitors or businesses that operate in adjacent industries that can integrate themselves with the core business of the target company.

The financial acquirers represent the institutional purchases like private equity firms that intend to gain ownership of the companies for gaining control of the business. As per Jonse, et al. (2019), many types of mergers and acquisition deals include vertical, horizontal and consumer rate.

The horizontal merger represents the combination of two companies that operate and performs across similar sectors and can be direct competitors. Vertical merger denotes the union of a business with one of its suppliers in its supply chain for increasing the organisational capabilities and moving up or down in the supply chain for gaining greater control of the resources (Reddy, 2014). Conglomerate mergers represent the combination of two companies for diversification of the products and services across different industries that are not related to each other.

Based on the study of Chukharev-Hudilainen, et al., (2017), it has been evaluated that concentric mergers and acquisitions occur when two organisations are operating in the same industry with the same customer base but having different types of products or services.

For example, a laptop manufacturing firm has merged with the bag company that would produce baggage for carrying the electronics (Alkaraan, 2017). This merger pattern is mainly reflected for supporting the consumers to avail the product in higher number which is beneficial for both the businesses. Extended product or service line-up is also executed through this merger type (Nguyen & Kleiner, 2003).

On the contrary, conglomerate mergers and acquisitions occur when both the target seeking and target firm are different concerning product offering, production stage, and industry type. Complete exploration of new business areas is mainly justified, supporting following diversification strategy and ensuring business success.

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Managerial Motives for M&A Deals

According to Li, et al. (2015), the managerial motives for mergers and acquisitions in cross-border deals include managing assets across other industries to intensify the value of their skills and enhance their importance at the company. On the contrary, Reddy (2014) said that the organisational managers vouch for mergers and acquisitions to diversify across other industries to establish internal capital markets and reduce the risk of asymmetric information for sustaining high levels of debt.

The managerial motivation behind mergers and acquisitions represents the establishment of revenue synergies with market expansion and diversification of products in addition to the scope of expanding research and development activities (Servaes, 1996). Other motives also include reduction of the cost structure of the organisation to the establishment of the economics of scale by gaining access to new technologies.

The managers also intend to achieve incentives with mergers of companies as the top management guarantees more power and prestige (Nguyen & Kleiner, 2003). An increase in the size of the organisation through mergers and acquisitions directly influences the compensation of the managers that serve as a motive for mergers and acquisition deals.

According to Jaxon, et al., (2019), the managerial motives for merger and acquisition are reflected through strategic orientation, financial, and executives’ perspectives. The managers aimed to raise the profit of the business that has determined its success. The strategic improvement is justified through raising share value, talent exploration, and increased customer base that has improved the managerial ability of decision-making (Jonse, et al., 2019).

The financial benefit is identified as the main focus as the expenses would be controlled, which has enhanced the organisation’s revenue generation. The managerial motivation behind mergers and acquisitions represents the establishment of revenue synergies with market expansion and diversification of products in addition to the scope of expanding research and development activities.

On the other hand, Nguyen & Kleiner, (2003) added that mergers are motivated through the personal goals and interests of top management which is driven by their ego, intelligence, forecasting ability. Managers prefer mergers and acquisitions as empirical evidence has reflected that the managers’ compensation is directly proportional to the firm’s size (Lennox, et al., 2018). The contemporary compensation package comprises a performance bonus, base salary, stocks, and options where the base salary would be raised in case of the rising size of the business.

Same Industry M&A Deals Provide Higher Returns than Different Industry M&A Deals

As per Reddy (2014), mergers and acquisitions are mostly evident across the same industry as the organisations intend to increase their competencies and achieve horizontal and vertical integration (Wei & Link, 2018). For example, Spanish retail bank Santander has made smaller bank acquisitions, allowing them to be one of the largest global retail banks.

The organisation can diversify its operations through merging or acquiring another firm, as it would assist the management to explore the diversified range of opportunities for the new business (Doukas, et al., 2001). Identifying experienced and skilful executives for the firm would be simplified through following the business expansion process and the long-term strategies are focused mainly. The benefits of providing taxation would also motivate the business management to follow the M&A process.

As per Servaes (1996), mergers and acquisitions are finalized to achieve growth in the business operations and expand the existing operations. The same industry mergers and acquisitions result in better utilisation of the organisational resources and capabilities along with achieving an expansion of the operations.

This results in the acquisition of the customer base of the target company along with reducing market rivalry (Du & Sim, 2016). M&A deals in the same industry have a higher chance of success due to easy customer acceptance and acquisition of a potential or existing competitor.

As per Alkaraan (2017), the same industry expansion results in better control of the supply chain, better utilisation of the available resources, and reduced cost. On the contrary, Doukas, et al., (2001) mentioned that mergers and acquisitions in different industries result in the creation of diversification of the products and services along with providing greater access to new markets. The expansion in cross-industry results in an increase in the value proposition of the organisation and develops the organisational competencies for operating in a new industry and environment.

Cross-industry M&A deals are done for diversification of Differentiation enables the organisations to distinguish their products and services from the market competitors by increasing the value proposition and integrating unique features and enhancing performance.

As per Ciceri (2013), differentiation in the products and services involves the addition of new technologies along with better quality and exceptional services for attracting the customers by establishing a sustainable competitive advantage through the product positioning.

However, the institutional context of the companies influences their choice of the same industry or cross-industry mergers and acquisition deals. The internal capital markets serve as a major motivation for intensifying the cross-border M&A deals. According to Doukas, et al., (2001), the Swedish companies have been analysed to initiate cross-industry deals for mergers and acquisitions to enhance the internal capital markets and increase the shareholders’ value.

It has been analysed that there are higher performance gains when the companies perform M&A deals in the same industry due to the investment in the core capacities of the business and expansion of the intangible assets. Refocusing of the assets and divesting results in the enhancement of the value of the firm in addition to the enhancement of the managerial ownership in the case of Sweden.

As per Reddy (2014), mergers and Acquisitions offer differentiation to the firms in general that enable them to distinguish their products and services from the market competitors by increasing the value proposition and integrating unique features and enhancing performance.

As per Ciceri (2013), differentiation in the products and services involves the addition of new technologies along with better quality and exceptional services for attracting the customers by establishing a sustainable competitive advantage through the product positioning.

Cross-industry M&A deals create the base for differentiation for the companies due to the scope of integrating new features to the existing products and services based on the absorption of the core competencies and capabilities of the acquired firm.

According to Rahman, et al., (2018), cross-border mergers and acquisitions have contributed to capital accumulation on a long-term basis along with gaining talent from the diversified field. Merger and acquisition are mainly reflected in the technology, financial services, healthcare, and retail sectors due to having higher opportunities for flourishing the business (Du & Sim, 2016).

The rapid alteration in the landscape of the healthcare sector with Government laws has caused difficulties for small and medium-sized companies due to limited capital for keeping up with the changes (Yılmaz & Tanyeri, 2016). Cross-industry mergers and acquisitions have also become normal in contemporary times due to achieving differentiation in the products and services for acquiring a larger customer base.

In case of cross-border merger and acquisition, the taxation and charges would be complex and it is needed to be decided based on the operation of the country. In contrast, same country merger is simplified concerning that of the foreign one.

The motive of diversification in organisations revolves around the enhancement of shareholder wealth as the managers intend to establish internal capital markets and reduce the variability of earnings in the same markets. On the contrary, Doukas, et al., (2001) said that the organisational managers also undertake the decision of diversification to protect the value of human capital and increase their benefits while mediating cross-industry M&A deals.

The diversification motives for acquisition in the cross-industry represents the quest for the generation of value and improvement of the long-term performance of the bidders of acquisition to increase their advantages in the internal capital market (Du & Sim, 2016).

This is done to establish a greater presence in the external capital market along with overcoming the constraints and imperfections. The same industry M&As deliver higher returns due to the increase in the synergies as the two firms operating across the different levels of the supply chain begin to complement each other and reduce dependencies and delays for increasing production efficiency (Gaughan, 2010).

This also delivers the advantages of more efficiency in production and cost management thereby increasing the organisational profits. The cost of operations reduces significantly due to total control of the larger company and reduction in price control.

Domestic Same Industry M&A Deals Having Higher Returns Than Domestic Cross-Industry M&A Deals

According to Boloupremo & Ogege, (2019), mergers and acquisitions are a complex and time taking process for organisations that requires several months or years to complete. According to Servaes (1996), the trend of diversification across organisations had initiated from 1960 to early 1970 that wear propelled through mergers and acquisitions.

From the study of Cheng, et al., (2017), the benefits and drivers of merger and acquisition are reflected through scale economics, scope economics, synergies, opportunistic value generation, raised market share, high competition level, access of talents, risk diversification, implementation of improved strategy along with benefits of taxes.

Underpinning all the merger and acquisition activities drives promising sales economics that consists of increased access to the capital, limited cost due to increased volume, and modified bargaining power with distributors in both domestic same industry and cross-industry M&A deals (Yılmaz & Tanyeri, 2016). The financial acquirers represent the institutional purchases like private equity firms that intend to gain ownership of the companies for gaining control of the business.

According to Rahman, et al., (2018), a horizontal merger is mainly reflected when both the target organisation and target seeking company belong to the same industry and deliver the same pattern of product or services. It has also indicated that the firms have operated in the same production stage and same customer base.

The particular type of merger is justified by minimising the competition for raising its market share and revenue margin (Cheng, et al., 2017). It also justified cost efficiency due to the elimination of non-productive and repetitive activities. Horizontal mergers across the domestic markets provide higher returns in terms of increasing the market share along with enhancing the competitive dominance due to the exclusion of a competitor from the market. Higher retunes in domestic same industry M&A deals.

On the other hand, Du & Sim, (2016) argued that the vertical merger has occurred between the firms which have operated in the same value chain that produce similar types of goods and services that vary the production stage. This type is mainly followed for providing essential supply to the target-seeking organisation and avoiding all the supply chain shortages (Gaughan, 2010).

Limiting the supply of essential goods and services to the competitors help the company to generate higher revenue and profit along with gaining satisfactory share value. It has also provided savings in consumption and cost as the essential goods are produced in-house by the firm instead of paying more to another one.

The domestic mergers and acquisitions across a similar industry create the scope for increasing control and corporate governance (Dringoli, 2016). The completion of the entire procedure of transference of the corporate ownership becomes seamless across the same industry and does not require very high investment in the training of the staff and alteration of the business processes.

The same industry deals with mergers and acquisitions deliver higher returns to the investors due to its capacity to quickly connect and resonate with the consumers without disrupting the normal business processes. While operating in the domestic market, such types of deals and analysed by the customers as well as the shareholders remain optimistic about the improved performance and operational efficiency (Servaes, 1996).

The same industry deals offer higher returns due to the increase in the value offered to the customers in comparison to the two individual companies. The same industry deals in this regard indicate the materialization of financial economies across the different levels in the supply chain that creates economies of scale.

As per Doukas, et al., (2001), mergers and acquisitions among companies selling similar kinds of services and products create the situation of a lower cost of production amounting to a cost advantage for the customers. However, industries with high fixed costs also benefit from these kinds of deals as higher output improves efficiency across the companies, thereby lowering cost and consumer prices.

The domestic same industry mergers and acquisition deals offer higher returns to the investors due to providing the access to a better and more efficient distribution network by combining the infrastructure of both the companies. This also creates the scenario of more profit and increasing the availability of resources that can be invested in research and development.

Pharma companies often pursue M&A deals in the same industry in the domestic markets to increase profits and access better resources for R&D. Bristol-Myers Squibb has acquired Celgene in 2019 for $74 billion after gaining regulatory approvals (Europeanpharmaceuticalreview, 2019).

As a result, Celgene has become an owned subsidiary of BMS. It created massive benefits for the company by widening the pipelines of production and R&D in the domains of immunology, oncology and haematology, etc. Hence, the same industry deals in this regard also proliferate the scope for innovation and value addition for the consumers leading to higher sales and revenue generation scope.

Cross-Border Same Industry M&A Deals Having Higher Returns Than Cross-Border Cross-Industry M&A Deals

As per Doukas, et al., (2001), cross-border mergers and acquisitions represent the transactional agreements between foreign organisations and domestic businesses in the target country. The cross-border mergers and acquisitions became a trend in 1990 due to an increase in similar transactions in Asia Pacific.

According to Nguyen & Kleiner (2003), the increase in globalisation and acceptance of liberalisation across the countries along with opening up the economy for global trade had increased the foreign direct investments and merger and acquisition deals across cross-border countries.

The developing countries are targeted for cross-border merger and acquisition deals due to the rapid economic growth rates and availability of resources (Reddy, 2014). The foreign companies undertake management consultancies and evaluate the external environment of the cross-border target countries along with evaluating the potential partners before making investments.

Merger and acquisition between companies take place in different forms, including cross border same industry combination and cross-border cross-industry. Merger and acquisition benefit the company in terms of increasing revenue generation along with the customer base. Considering the two different combinations of M&A, Kling, et al., (2014), states cross-border cross-industry M&A can provide higher returns in comparison to the cross-border same industry.

The authors claimed that the cross-border cross-industry involves more factors that are advantageous compared to the cross-border same industry. The basic reason for a higher return in cross-border cross-industry is the unification of customers from both the industry.

Not only does the customers of a particular business come to another, but the overall consumers of a sector come. For example, the merger between Microsoft and Nokia is an example of cross-border cross-industry M&A. The merger between the two companies has provided access to both the companies to increase their returns through the increase of customer base (Forbes, 2021).

Nokia is a telecommunication company whereas Microsoft is an organisation belonging to the technological sector. While Nokia is from Finland and Microsoft is from the USA. The merger between the companies has given benefits to Nokia with increasing market share by using the technologies of Microsoft.

Concerning the factor, the study of Maas, et al., (2019), claimed that the use of another’s resources, especially infrastructure is beneficial for businesses to develop products. The author also stated that the merger between cross-industry businesses helps develop new products through technology collaboration.

The common loyal customers of both the company become assured consumers and the reason for higher returns in business. The study of Dringoli, (2016) also argued that the increase of customer base or higher returns are entirely dependent on the market area in which the merged businesses operate.

The author claimed that a merger between companies from two different domestic markets could provide higher returns in both cross-industry and cross-border. Although, the author added and claimed that mergers or acquisitions between organisations from the international market can deliver high returns as both organisations will have a loyal customer base in both countries.

On the other hand, cross-border and same industry merger and acquisition can have higher returns for the business, but the chance is less in comparison to cross-border cross-industry (Rani, et al., 2016). Cross-border same industry M&A helps business to grow and earn high returns if any external environment factor exists.

For example, the merger between Vodafone and Mannesmann AG was done to occupy the newly developing market in Europe. Vodafone was operating its business in the UK only, but the merger opens a new opportunity for the telecom giant to occupy the European market (Irishtimes, 2000). The ability of the company to use the resource of both organisations have also been the reason for increasing returns of the businesses.

Research Gap

The investigation has encountered a research gap during the process of analysis regarding whether the same industry deals with mergers and acquisitions are more successful than cross-industry deals. This is because there is a gap in research regarding the context as individual analysis have been made regarding the mergers and acquisition deals. Still, there is a lack of investigation regarding the comparison of the two contexts.

Summary

Based on the above study, it has been summarised that the merger and acquisition would drive the company’s success in terms of profitability and gaining proper market share. The organisational managers also undertake the diversification decision to protect the value of human capital and increase their benefits.

Mergers and acquisitions are mostly evident across the same industry as the organisations intend to increase their competencies and achieve horizontal and vertical integration. The vertical merger has occurred between the firms, which have operated in the same value chain that produce similar types of goods and services that vary the production stage.

The financial benefit is identified as the main focus as the expenses would be controlled, which has enhanced the organisation’s revenue generation. M&A deals in the same industry have a higher chance of success due to easy customer acceptance and acquisition of a potential or existing competitor.

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