An Empirical Investigation of the Effects of Merger and Acquisition on Firms' Profitability

INTRODUCTION With the rapid advancement in technology, the global business industry is also at the forefront of such changes. For the past couple of years, we have witnessed the introduction of new products in the market. Over-capacity indeed is the glaring issue here for the very basic of the Law of Demand & Supply seems to have been ignored entirely. In the face of this predicament, firms need to reinvent ways of coping with the harsh reality of the industry. Should production be cut or totally cease from operation and rely solely on robust branding, or be more market pro-active and buy-up fledgling competition to emerge as the "last-man- standing"? Economic advantage and competitive edge is the name of the game. Business combination is one proven and tested method by companies wanting to grow and gobble up a larger market share. The emerging business scenario created an additional burden to the already struggling corporations' existence, in almost all types of industry, which is due to the ever increasing demand for innovative strategies. To survive the dog-eats-dog world of competitiveness, a number of these players engage in business combination--wherein two or more companies incorporate into a single accounting entity. It is a common practice for companies who underwent such combination to still continue with their product or brands and distinct identities. However, after the business combination has commenced, the combined companies will now share a common culture and mission aside from bearing the same corporate name. The major types of business combination as follows: mergers, consolidations and stock acquisitions. Merger is the combination of two or more entities by purchase acquisition whereby the identity of one of the entities remain while the others are being dissolved. The reasons behind the merger transactions are basically gaining market share, competitive advantage, increasing revenues and risk and product diversifications. With the global financial crises, it is noticeable that mergers and acquisitions have considerably increased. Corporations employed such combination not only for the sake of competitiveness but to maintain a firm foothold in the industry as well. This has lead to the significant transformation in the business landscape. Though one question that hounds the industry, will the entities be able to handle the ramifications of the merger coupled with the risks involved in such activity and will the business combination improve the profitability of the firms. This paper investigates the effect of merger and acquisition on firm's profitability in terms of return on equity and return on assets. REVIEW OF RELATED LITERATURE According to Yurtoglo, there are three usual effects of merger and acquisitions: financial performance, industry and aggregate concentration levels and social welfare. The financial performance of the company would definitely be affected by the business combination, as a result of synergies or disruption that may either increase or decrease the company's operating performance. On the other hand, the combination of two or more companies would decrease the number of players in a given industry. Finally, Yurtoglo indicated that as a result of the changes in financial performance and aggregate concentration levels, the social welfare of the people would also be affected by merger or acquisition. For example, the recent acquisition of Equitable PCI by Banko De Oro (BDO) led to the rise of BDO as the number one bank in the Philippines, in terms of assets and amount of deposits. In addition to this, BDO also received increased market presence, as a result of converting the former Equitable PCI banks into BDO banks. This, in effect, made the life of BDO depositors and the society at large easier, since they have more alternatives on which branch they opt to conduct their transaction. There had been numerous studies from different countries conducted on the effect of merger or acquisition on the financial profitability of the companies. …