DOI: 10.32602/jafas.2022.

021

Effectiveness of Mergers and Acquisitions in Maltese Listed Companies: Financial

Performance, Market Reactions and Shareholder Value
Peter J. Baldacchinoa Amy Camillerib Anna Magrinc Simon Grimad
aUniversity of
Malta, Professor, Department of Accountancy, Faculty of Economics, Management
and Accountancy, [email protected]
b University of
Malta, Visiting Lecturer, Department of Accountancy, Faculty of Economics,
Management and Accountancy, [email protected]
c University
of Malta, Graduate Accountant, Department of Accountancy, Faculty of Economics,
Management and Accountancy [email protected]

d University
of Malta, Head and Associate Professor, Department of Insurance and Risk
Management, Faculty of Economics, Management and Accountancy, [email protected]

Keywords Abstract
Mergers, Purpose: W The objectives of the paper are to assess the
Acquisitions, effectiveness of mergers and acquisitions (M&A) in Maltese
listed companies on acquirers’ financial performance, to
Maltese Listed examine the market reactions to M&A announcements and to
Companies, seek to obtain further insights on the perceived value arising
Financial from M&A activity.
Performance, Methodology: The methodology involved an Event Study on
acquirers’ share price movements and semi-structured
Market Reactions, interviews with relevant company representatives and Maltese
Shareholder Value. stockbrokers.
Findings: The findings of the paper indicate that the few M&A
Jel Classification cases wherein profitability -measured by growth in earnings
G34. before EBITDA - was enhanced and operational efficiency was
improved took sound financing decisions despite facing
Paper Type challenging circumstances. The Maltese market was generally
Research Article non-reactive within relatively short timeframes around
announcements although with positive reactions within longer
Received estimation periods. Furthermore, the perceived value by
acquirers and stockbrokers varied considerably, yet such value
05.05.2022 was commonly attributed to effective due diligence and
successful integration. The study therefore concludes that
Revised recent M& A activity in Malta has often been limited in its
30.05.2022 effectiveness towards enhancing shareholder value.
Originality/Value: the paper provides both corporate managers
Accepted and stockbrokers with insights into M&A activity particularly in
12.06.2022 a small-state market.

141
 Journal of Accounting, Finance and Auditing Studies 8/1 (2022): 141-160

Introduction

This research paper carefully examines whether merger and acquisition (M&A) activity
constitutes an effective vehicle to enhance shareholder value. More specifically, this paper
analyses the impact of M&A activity on the financial performance of acquiring companies,
examines whether the local equity market’s reaction to M&A announcements reflected a good
indicator of M&A success/failure and obtains insights on the perceived value gained through
M&As. The study focuses on acquiring companies listed on the Malta Stock Exchange (MSE)
which undertook M&A deals between 2007 and 2016.
Given that research attempting to evaluate the financial implications of M&As within the Maltese
setting is very limited, this study sheds light on characteristics attributable to a small market.
This study could provide stock brokers (brokers), investors and corporate managers with
insights into the dynamics of M&A activity.
1 Literature Review

One critical question is whether M&As actually manage to exploit synergistic effects to repay the
premium paid for the target and generate greater shareholder returns. This is an empirical
question which has resulted in a great deal of research evidence.
Several empirical approaches have been used to measure post-acquisition performance.
However, different approaches developed over the past years do not necessarily give consistent
conclusions, as they at times diverge in the judgement each seem to support as far as the
effectiveness and efficiency of M&As are concerned. As stated by DePamphilis (2011), the two
most common methods of analysing M&As are:
A. Accounting-based Measures
B. Event Study
1.1 Accounting-Based Measures
This approach resorts to an analysis of companies’ financial statements and accounting ratios.
Findings of numerous accounting-based studies are inconsistent, mainly because:
A. there is no agreement on a definite set of financial indicators/ratios that are to be
included in such studies,
B. the outcome of the accounting approach seems to be dependent on the number of years
included in the study.
According to Thanos and Papadakis (2011), the three most common categories of accounting
measures applied globally consist of profitability measures (e.g. return on assets), growth
𝐶𝑎𝑠ℎ𝑓𝑙𝑜𝑤
measures (sales, profits or asset growth) and operating cash flow measures (e.g. 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠).

142
 Journal of Accounting, Finance and Auditing Studies 8/1 (2022): 141-160

Table 1 includes findings of some of the studies grouped geographically.

Table 1: Findings on Use of Accounting-based Measures
Location Results
US Healy, Palepu and Ruback (1992) used cash flow indicators to conclude
that operating performance of merged firms improved significantly post-
acquisition.
Linn and Switzer, (2001) supported Healy, Palepu and Ruback`s (1992)
findings, namely that post-acquisition performance improved. However,
the former also concluded that mergers financed by cash were more likely
to improve pre-tax cash flows than mergers financed by equity.
Australia Lau, Proimos and Wright (2008) conducted a more recent study, whereby
they also utilised certain accounting operating performance measures to
study Australian M&As. This study found some evidence of improved
operating performance post-merger, since profitability, cash flow,
efficiency and financial gearing measures were higher after the M&A.
Europe Martynova, Oosting and Renneboog, (2006) investigated the long-term
operating performance of European acquisitions. It was concluded that the
decrease in profitability post-event was insignificant. However, it was
found that hostile takeovers and deals made by tender offers significantly
underperformed friendly takeovers and negotiated deals.
UK Burt and Limmack (2003) analysed the operating cash flow of acquiring
companies in the UK retail sector, whereby it was concluded that the
operating performance of post-merger firms was higher than the pre-bid
performance.
Emerging Grigorieva and Petrunina (2015) used
𝐸𝐵𝐼𝑇𝐷𝐴
and economic profit
𝑆𝑎𝑙𝑒𝑠
Capital
measures to study a sample of M&As in developing countries. They
Markets
concluded that accounting performance deteriorates post M&A. Thus,
merged firms in such countries were unable to exploit expected synergies
or to integrate successfully to achieve shareholder value.

1.2 Event Study

Under market efficiency conditions, the impact of any event is immediately reflected in its
respective stock price (Sitthipongpanich, 2011). The Event Study examines whether upon the
M&A announcement, stock returns of acquiring of target firms increase, thus generating
abnormal returns (ARs). ARs are shareholder gains which exceed the expected return for a
specific level of risk. This approach tries to eliminate stock price fluctuations unrelated to the

143
 Journal of Accounting, Finance and Auditing Studies 8/1 (2022): 141-160

acquisition by calculating the discrepancy between the actual return and the “theoretical”, or
expected, return which is estimated by the Capital Asset Pricing Model or by a stock index
(Khanal, Mishra and Mottaleb, 2014).
US and UK literature support the conclusion that target companies experience statistically
significant wealth gains. Conversely, the assessment of the returns for bidder firms` shareholders
seems to be more ambiguous. Subeniotis et al. (2011) conclude that ARs of acquiring firms are
insignificant and negative. However, there are also studies which report increases in the
shareholder value of acquiring firms around M&A announcements. One such study is that by
Khanal, Mishra and Mottaleb (2014), whereby results show that positive financial gains were
realised by acquiring firms within four days, ten days as well as sixty days around M&A
announcements.
Studies have shown that ARs vary when assessed within different timeframes. Mahate and
Sudarsanam (2003) explored whether differences in ARs existed between the short and long-
term performance of UK companies. They concluded that generally ARs in the short term are
negative and returns are further worsened, resulting in long-term significant underperformance.
Zaremba and Płotnicki (2016) also studied the short-term and the long-term effects of European
M&As. Results have shown increasing and statistically significant ARs gained within two days
after the M&A announcement. However, when capturing a longer time span, ARs decreased
though they did not fall in negative territory.
1.3 Critical Success Factors
In view of the apparent mixed impacts of M&A activity, it becomes relevant to identify the critical
factors from literature sources that can contribute towards the creation of a value-enhancing
M&As.
KPMG (2016) identified a well-executed integration plan as the most important critical success
factor of M&A, which, along with effective due diligence, makes it more probable that the deal
meets its strategic objectives and improves shareholder return.
According to Rahman and Lambkin (2015) the main contributory factor to low M&A success is
acquirers having to pay too high a premium for the target. Other reasons, provided by Burnie,
Hurtt and Langsam, (2005) include executives rushing through the M&A process to make the
deal; managers overpaying since assumptions about synergistic effects might be overoptimistic;
high key employee turnover and major cultural differences between the two firms especially
when physical and psychological space exist in cross-border M&A.
2 Methodology

Both primary and secondary data sources were used to reach the paper’s objectives. To identify
the companies involved in M&As and subject to analysis, financial reports of all Maltese listed

144
 Journal of Accounting, Finance and Auditing Studies 8/1 (2022): 141-160

entities for the period under review were examined. Company M&A announcements were also
reviewed from the MSE website and the dates of such announcements were noted down. Upon
identifying M&As, those transactions whose target revenue was less than 10% of that of the
acquiring group’s were considered as irrelevant for such analysis and were thus eliminated. Such
elimination was made upon the view that any impact of immaterial M&As on the financial
performance of the acquiring group is expected to be diluted away. This process identified eight
relevant acquisitions undertaken by seven companies.
2.1 Research Instrument 1 – Review of Companies’ Published Financial Information
Table 2 presents the ratios applied in this study to assess each of the key measures of financial
performance. Such measures are based on a study by Lau et al., (2008).
Table 2: Measures for Financial Analysis
Profitability Return on Assets (ROA) =
𝑷𝒓𝒐𝒇𝒊𝒕 𝒂𝒇𝒕𝒆𝒓 𝒕𝒂𝒙
∗ 𝟏𝟎𝟎%
𝑻𝒐𝒕𝒂𝒍 𝒂𝒔𝒔𝒆𝒕𝒔

Growth Earnings before Interest, Tax, Depreciation and Amortisation (EBITDA)

Growth.
Operating 𝑷𝒓𝒆 − 𝒕𝒂𝒙 𝐎𝐂𝐅
∗ 𝟏𝟎𝟎%
Cash Flow 𝑶𝒑𝒆𝒏𝒊𝒏𝒈 𝒃𝒐𝒐𝒌 𝒗𝒂𝒍𝒖𝒆𝒔 𝒐𝒇 𝒐𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝒂𝒔𝒔𝒆𝒕𝒔

(OCF) Where:
Pre-tax OCF was calculated as operating profit adjusted for non-cash
elements within operating assets.
Operating assets are defined as “the total of net fixed assets plus current assets,
less cash and marketable securities” (Burt and Limmack, 2003, p.152).
Financial 𝑻𝒐𝒕𝒂𝒍 𝑳𝒐𝒏𝒈 − 𝒕𝒆𝒓𝒎 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔
∗ 𝟏𝟎𝟎%
Gearing 𝑺𝒉𝒂𝒓𝒆𝒉𝒐𝒍𝒅𝒆𝒓𝒔′ 𝑭𝒖𝒏𝒅𝒔 + 𝑻𝒐𝒕𝒂𝒍 𝒍𝒐𝒏𝒈 − 𝒕𝒆𝒓𝒎 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔

Operational The proportion of cost of sales (CoS) and administrative costs to revenue:
Efficiency 𝑪𝒐𝑺 + 𝑨𝒅𝒎𝒊𝒏𝒊𝒔𝒕𝒓𝒂𝒕𝒊𝒗𝒆 𝑪𝒐𝒔𝒕𝒔
∗ 𝟏𝟎𝟎%
𝑹𝒆𝒗𝒆𝒏𝒖𝒆
For each M&A, all the above measures were computed, starting from one year pre-acquisition
till 2017, the latter being the latest year for which financial statements were publicly available
until the publication of the study.
2.1.1 Limitations
Financial ratios may have possibly captured issues not influenced by the M&As but which still
affected companies’ performance.
2.2 Research Instrument 2 – Event Study to Examine the Market Reaction to M&A
Announcements
The Event Study method was based on the approach adopted by Khanal et al., (2014), whereby
one seeks to calculate abnormal returns (ARs) by examining whether the share price of the
company involved in the M&A moved in an abnormal manner vis-à-vis the trend established by

145
 Journal of Accounting, Finance and Auditing Studies 8/1 (2022): 141-160

the equity market during the period. Movements in the MSE Equity Index were taken as a
proxy of price movements of the overall local market registered in periods before and after
each M&A. The Event Study was only applicable to firms which were equity-listed on the MSE.
The comparison of the company’s share price with that of the MSE Equity Index was made to
decouple movements attributed to systemic conditions affecting the whole market from
movements specifically attributed to the acquisition.
The impact of each event was evaluated using different time windows around the
announcement date, with the widest window being of 60 days around the announcement date
(-30, +30).
2.2.1 The Market Model
To come up with ARs, the Market Model was applied whereby individual price movements
were correlated to market index movements through a regression, as shown in equation 1:
Equation 1: The MM Formula

According to equation 1, the AR is the difference between the actual return of stock i at time t
(Rit) and actual market return at time t (Rmt).
For each firm under analysis, daily share price readings, represented by Rit, and corresponding
MSE Equity Index data, represented by Rmt were imported into the model. Subsequently, for each
firm, a regression in the form of Rit = αi + βiRmt was estimated and daily ARs were generated, the
latter being the residual values to each regression.
Additionally, cumulative ARs for each time window were obtained to better trace the behaviour
of the AR variable over different timeframes. In fact, among the time windows taken for
estimation were (-1, +1), (-5, +5), (-10, +10), (-20, +20,), (-30, +30), (-5, +10), (-5, +20) and (-5,
+30). Such Cumulative ARs were also averaged across firms. These Average cumulative ARs for
each time window in consideration could thus be tested for statistical significance.
2.2.2 Limitations
Firstly, this methodology assumes the presence of market efficiency. However, market

146
 Journal of Accounting, Finance and Auditing Studies 8/1 (2022): 141-160

inefficiency may have potentially limited this ability for prices to reflect new market information.
Moreover, within the estimation time period, factors specifically attributed to the company but
unrelated to M&A may have influenced individual share price movements. Such limitations were
inherently present within the model.
2.3 Research Instrument 3 – Conduct of the Interviews to Obtain the Perceived Value
The primary data was collected through ten semi-structured interviews: five were held with
company representatives (coreps) and five with brokers. Getting brokers’ opinion enabled a
more objective and external view on M&A’s perceived value.
The interview schedules of both respondent groups were made up of both open-ended and close-
ended questions. Open-ended questions permitted respondents to delve deeper into the subject
and express their opinions on practical issues. Analysis for close-ended questions was carried
out using Statistical Package for Social Scientists (SPSS), where the Friedman Test was applied
to scaled questions.
2.3.1 Limitations
The small sample size of the study limited the extent of statistical tests which could be
performed.
3 Analysis of Results
3.1 Impact of M&As on the Acquiring Group’s Financial Performance
This section presents findings on the financial performance of acquiring companies from one
year pre-acquisition onwards. Additionally, for each measure, the yearly average percentage
point (p.p) change for each company following M&A is shown. It is to be noted that Company A
was not considered in the computation of average measures because its outlier results are
deemed to be attributable to company-specific management challenges, and such factors could
not be attributed to M&A.
A. ROA
Table 3 includes ROA estimators for each company under analysis. Three companies present
improvements in ROA while another three companies experienced yearly declines in their ROA
position from the year of acquisition onwards.
It is to be noted that on average, ROA declined by 0.53 p.p each year from the year of acquisition
onwards, implying that the average ROA position of the companies concerned slightly worsened
and so did shareholders’ return.

147
 Journal of Accounting, Finance and Auditing Studies 8/1 (2022): 141-160
𝑷𝒓𝒐𝒇𝒊𝒕 𝒂𝒇𝒕𝒆𝒓 𝑻𝒂𝒙
Table 3: ROA Results = ∗ 𝟏𝟎𝟎%
𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔
Companies
A B C D E F G
2006 1%
2007 1%
2008 2%
2009 2%
2010 -6% 2%
2011 -5% 1%
2012 6% 1%
2013 8% 1%
2014 -2% 1% -2% 1%
2015 -30% 13% 2% 0% 1% 6% 2%
2016 -154% 8% 2% -1% 1% 3% 6%
2017 -94% 7% 2% 1% 1% -5% 10%
Table 3 - Continued
Yearly Average p.p Change in ROA for each M&A
- -3 p.p +0.33 p.p +1 p.p 0 p.p -5.5 p.p +4 p.p
Yearly Average p.p Change in ROA: -0.53 p.p

B. Growth
Table 4 presents the yearly growth registered by each firm during the period under analysis.
Clearly, most companies experienced positive and considerable growth measures post-
acquisition, except for Companies A and F. On average, one can generalise that growth was
impacted positively post-M&A.
Table 4: EBITDA GROWTH
Companies
A B C D E F G
2006 5%
2007 14%
2008 38%
2009 -9%
2010 -123% 8%
2011 38%1 -19%
2012 -619%2 -17%
2013 40% -25%
2014 -42% N/A -18% -11%
2015 -405% 5% 201% 11% 26% 74% 7%
2016 362%1 19% 13% 18% 5% -47% 216%
2017 -66% 6% 43% 69% 9% -18% 7%
Yearly Average p.p Growth for each M&A
- +12.5 p.p +86 p.p +32.7 p.p +1.73 p.p -32.5 p.p +112 p.p
Yearly Average p.p Growth: +35.3 p.p

C. OCF
Table 5 shows results on the cash flow position of companies under analysis. Three companies,
being Companies B, D and G have registered average yearly p.p improvements in their OCF
performance while Companies C, E and F have deteriorated their cash flow position.

1 This figure is only positive because both the denominator and the numerator are negative.
2 This figure is negative because the numerator is positive while the denominator is negative

148
 Journal of Accounting, Finance and Auditing Studies 8/1 (2022): 141-160

𝑷𝒓𝒆−𝒕𝒂𝒙 𝐎𝐂𝐅
Table 5: OCF Results = ∗ 𝟏𝟎𝟎%
𝑶𝒑𝒆𝒏𝒊𝒏𝒈 𝒃𝒐𝒐𝒌 𝒗𝒂𝒍𝒖𝒆𝒔 𝒐𝒇 𝒐𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝒂𝒔𝒔𝒆𝒕𝒔
Companies
A B C D E F G
2006 36%
2007 27%
2008 12%
2009 13%
2010 9% 17%
2011 -1% 22%
2012 8% 22%
2013 16% 25%
2014 N/A 3% 3% 34%
2015 N/A 18% 3% 3% 40% 11% 12%
2016 23% 31% 1% 2% 35% 9% 42%
2017 44% 24% 1% 5% 31% 4% 19%
Yearly Average p.p Change in OCF for each M&A
- +3 p.p -0.67 p.p +0.67 p.p -0.45 p.p -3.5 p.p +3.5 p.p
Yearly Average p.p Change in OCF: +0.43 p.p

D. Financial Gearing
Table 6 presents results on the financial gearing for all companies under analysis. Four
companies under analysis, being Companies B, E, F and G presented yearly improvements in
the capital structure’s gearing while the remaining two companies experienced yearly gearing
increases.
𝑻𝒐𝒕𝒂𝒍 𝑳𝒐𝒏𝒈−𝒕𝒆𝒓𝒎 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔
Table 6: Financial Gearing = ∗ 𝟏𝟎𝟎%
𝑺𝒉𝒂𝒓𝒆𝒉𝒐𝒍𝒅𝒆𝒓𝒔′ 𝑭𝒖𝒏𝒅𝒔 + 𝑻𝒐𝒕𝒂𝒍 𝒍𝒐𝒏𝒈−𝒕𝒆𝒓𝒎 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔
Companies
A B C D E F G
2006 91%
2007 89%
2008 88%
2009 87%
2010 14% 87%
2011 10% 86%
2012 8% 86%
2013 7% 86%
2014 9% 57% 37% 87%
2015 103% 35% 69% 43% 88% 84% 67%
2016 -489% 36% 70% 43% 88% 77% 70%
2017 421% 32% 70% 42% 88% 81% 63%
Yearly Average p.p Change in Financial Gearing for each M&A
- -0.67 p.p +4.33 p.p +1.67 p.p -0.27 p.p -0.67 p.p -2 p.p
Yearly Average p.p Change in Financial Gearing: +0.40 p.p

E. Cost-to-Revenue Ratio
Table 7 shows the cost-to-revenue proportions pre and post-acquisition. Three companies have
registered yearly average reduction in cost proportions post-acquisition, and such companies
are the same ones experiencing positive ROA movements, as seen in Table 3. The remaining
three companies have registered increased proportions. On average, the cost-to-revenue ratio

149
 Journal of Accounting, Finance and Auditing Studies 8/1 (2022): 141-160

increased yearly by 2.30 p.p from the year of acquisition onwards.

This analysis shows that it may be very challenging for the acquiring group to immediately
register and benefit from cost synergies post-acquisition. In fact, only Companies C and G hint
elements of operational efficiency in the year of acquisition, while Company D has not
effectively gained from lower cost-to-revenue proportions before the third year after the
acquisition.
𝑪𝒐𝑺+𝑨𝒅𝒎𝒊𝒏𝒊𝒔𝒕𝒓𝒂𝒕𝒊𝒗𝒆 𝑪𝒐𝒔𝒕𝒔
Table 7: Cost-to-Revenue Ratio = ∗ 𝟏𝟎𝟎%
𝑹𝒆𝒗𝒆𝒏𝒖𝒆

Companies

A B C D E F G
2006 36%

2007 37%
2008 62%
2009 62%

2010 111% 61%

2011 108% 66%

2012 93% 70%

2013 92% 68%

2014 97% 46% 75% 71%

2015 92% 79% 38% 76% 72% 82% 96%

2016 248% 84% 39% 77% 74% 102% 91%

2017 179% 83% 33% 73% 78% 117% 91%

Yearly Average p.p Change in Measure for each M&A

- +2 p.p -4.33 p.p -0.67 p.p +3.82 p.p +17.5 p.p -2.5 p.p

Yearly Average p.p Change in Measure: +2.30 p.p

F. Further Financial Indicators: Income Gearing

To further analyse the impact of increased debt on companies’ performance, for those
acquisitions partly or wholly financed by debt, namely Companies A, C, F and G, the income
gearing was computed. Results appear in Table 8.
It is found that those companies whose financial performance deteriorated post-M&A, namely
Companies A and F, also weakened their position in terms of income gearing, as their interest
payments rose more significantly than EBIT. It is noteworthy that the two companies that
registered improvements in Income Gearing, namely Companies C and G also showed improved
results in terms of ROA and cost containment, as seen in tables 4.1 and 4.6 respectively.

150
 Journal of Accounting, Finance and Auditing Studies 8/1 (2022): 141-160
𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝑬𝒙𝒑𝒆𝒏𝒔𝒆
Table 8: Income Gearing: ∗ 𝟏𝟎𝟎%
𝑬𝑩𝑰𝑻
Companies
A C F G
2014 309% 90%
2015 -10% 46% 20% 58%
2016 -22% 48% 724% 21%
2017 -16% 60% -122% 18%

3.2 The Market Reaction to M&A Announcements

This section presents the market’s reaction in terms of investors’ expectations on the likelihood
of success of M&As in question as reflected in share price performance around the M&A
announcement. After calculating cumulative ARs for each M&A across different time windows,
the average cumulative ARs (represented by GRNT) for each separate time window was
estimated. Table 9 presents GRNT of five M&As into consideration.
The computed Z score and P-value determine those GRNT values which are statistically different
from zero. These reported Z scores indicate that GRNT values are statistically significant when
calculated within the following time windows:
• (-5, +20)
• (-5, +30)
• (-20, +20)
• (-30, +30)
Table 9: Average Cumulative ARs & their Statistical Significance
Days GRNT Z Score P-Value
-1, +1 -0.60 -0.25 0.80
-5, +5 1.68 0.70 0.48
-5, +10 2.20 0.92 0.36
-10, +10 0.97 0.41 0.68
-5, +20 8.40 3.50 0.00
-5, +30 9.01 3.76 0.00
-20, +20 8.08 3.37 0.00
-30, +30 13.17 5.49 0.00
Average cumulative ARs are not statistically different from 0 over relatively short-term periods.
These results seem to imply that the market does not, in general, react to M&A announcements
in the short term. Statistical significance of abnormal positive returns is recorded over a longer
time span, specifically within and beyond the 26-day event window.
3.3 Findings on the Perceived Value Created through M&A Activity
Coreps’ and brokers’ views on the perceived value arising through M&A activity are presented
in this section.
3.3.1 Strategic Factors related to M&A
Coreps were asked to identify the corporate strategy chosen by the firm which led to M&A. All
M&A cases (5/5) aimed for a growth strategy.
Moreover, it was found that the most common motives behind M&A were to expand customer

151
 Journal of Accounting, Finance and Auditing Studies 8/1 (2022): 141-160

Table 10: Difficulty of challenges to yield operational synergies – Coreps’ Schedule

Mean Std. Minimum Maximum
Deviation
Cultural/Organisational 3.60 1.517 1 5
Integration
Others 3.20 1.304 1 4
Human resources 2.40 1.342 1 4
Rationalisation
Industrial Relations 2.20 1.643 1 4
IT Resources 2.20 1.304 1 4

Where mean score of 1 = very easy and 5 = very difficult

N=5
P-Value = 0.119

base (4/5) followed by the need to respond to shareholders’ investor appetite. (3/5).
When asked on the most critical M&A success factors, coreps emphasized on the need of a well-
executed integration plan (3/5) and effective due diligence (3/5). None of the respondents (0/5)

considered positive economy-wide conditions as a critical success factor.

3.3.2 Operational Considerations to M&A
When coreps were asked whether the acquisition provided opportunities for operational
synergy to be effective, it was found that the majority reported scope for operational synergy
(4/5), especially on overheads such as IT. However, one respondent (1/5) indicated that operational
synergy was “difficult to achieve when the target is cross-border.”
Revenue Synergy realisation seemed to depend upon the nature of the industry and type of
acquisition. Three respondents (3/5) found revenue synergy to be effective since the acquisition
was revenue-generating. On the other hand, according to one respondent (1/5), revenue synergy
was time-consuming in cases where the industry in which the firm operates is project-based.
Cost Synergy realisation was also reported to be dependent on the type of acquisition. The
majority of coreps (3/5) found cost synergies to be effective since the acquirer became involved in
target operations. Synergies were effective within Human Resources in terms of competency
sharing, purchasing costs in terms of bulk buying and alignment of certain departmental
functions to the group such as Marketing, Public Relations, Legal, Internal audit and Finance.
However, one respondent (1/5) stated that cost synergies were quite low since the acquisition’s
aim was financial, namely “…to accumulate a net asset value of the portfolio…” rather than to
manage operations.
Coreps were asked about the challenges to yield operational synergies. As seen in Table 10,
cultural/organisation integration was found to be difficult (m=3.60), while the mean rating scores
of the remaining factors varied from neither easy nor difficult in others (m=3.20) to easy in both
industrial relations (m=2.20) and IT resources (m=2.20)

152
 Journal of Accounting, Finance and Auditing Studies 8/1 (2022): 141-160

3.3.3 Perceived Impact on Financial Performance

Coreps were asked to rate the impact of M&A as measured through various financial aspects.
Results are presented in Table 11. Respondents expressed positive views on the M&A impact
on each financial aspect, with all mean rating scores exceeding 3. However, the highest impact
is found to be on growth (m= 5) while efficiency scored lowest (m= 3.20). Mean scores differ
significantly. This is in line with findings of the financial analysis included in Section 4.1, where
growth was shown to have benefitted in most companies, while a more diverse pattern
emerged from cost-to-revenue Ratios.

Table 11: Financial Implications of M&A – Coreps’ Schedule

Std.
Mean Deviation Minimum Maximum
Growth 5.00 0.000 5 5
Operating cash flow 4.60 0.548 4 5
Profitability 4.40 0.548 4 5
Financial gearing 3.80 0.837 3 5
Efficiency 3.20 0.837 2 4

Where mean score of 1 = very low and 5 = very high

N=5
P-value=0.009

Brokers were asked to classify those acquisitions which, in their opinion, have been successful.
Upon putting forward this question, the main findings on the review of each company’s
financial information, also presented in Section 4.1, were shown to each respondent.
In this assessment, there was a degree of convergence between the researcher’s findings and
the brokers’ opinion on the perceived success of each M&A. In fact, it was determined that all
brokers (5/5) agreed with the researcher’s assessments made to classify unsuccessful M&As.
With respect to the remaining M&As being classified as successful during the financial analysis,
the majority of brokers (4/5) agreed with these companies’ success.
Moreover, brokers were asked to comment on the acquisitions’ overall financial performance.
Respondents delved into the main reasons for the success or failure of the acquisitions under
study, with the main findings presented in Tables 12 and 13 respectively.

153
 Journal of Accounting, Finance and Auditing Studies 8/1 (2022): 141-160

Table 12: Reasons for Acquisitions’ Success – Brokers’ Schedule N=5

Foreign targets were acquired by three companies under analysis, where the main 3
motive was growth. Since the local market is already saturated, such companies were
given an immediate boost in growth.
Where acquisitions are treated as revenue streams and a way to cross-sell services and 2
reach more customers, performance automatically thrives.
Whenever the targets’ nature is operationally cash flow generating, any improvement 1
in the group’s financial performance is immediately reflected in financial statements.

Table 12: Reasons for Acquisitions’ Success – Brokers’ Schedule – Continued

Where the two companies operate in the same sector, probably better cost and 1
revenue synergies can be achieved. Such economies of scale in turn lead to
better performance.

Table 13: Reasons for Acquisitions’ Failure – Brokers’ Schedule N=5

Some failed acquisitions occur because of the nature of the industry they operate 3
in, being highly affected by exogenous shocks. One respondent claimed that one
particular target “is still facing difficulties and until last year, it was still a cash
drain on the whole group.” Such exogenous factors cause substantial risks, which
according to another respondent should have been factored in the acquisition
cost.
One particular company did not perform sufficient due diligence to identify the 2
target’s weaknesses. Consequently, “the acquirer ended up paying excessive
amounts for the target.” Moreover, issues of internal control in the company
were identified and continued to deplete performance.
The strategy of some acquisitions was set in the long term. Therefore, any 1
impact takes time to be reflected.

Brokers were asked to determine whether M&As between related firms perform significantly
different from M&As between unrelated firms. Three brokers (3/5) believed that it depends on the
ability to successfully integrate the two companies. One respondent specifically replied: “This
can be done even between unrelated firms as long as there is commitment by management on the
corporate strategy chosen” e.g. by cross selling each others’ products. The other two brokers (2/5)
replied that conceptually, there are advantages since the market is already known, so it is far
easier to acquire a gain after a relatively short period.
Brokers were asked on the main contributory factors of low M&A success, where they could
choose more than one response. The most popular factor was cultural differences between the
two firms (4/5), followed by paying excessive premiums for targets (4/5).
3.3.4 Perceived Impact on Shareholder Value
Brokers were asked on the local investor sentiment upon announcement of an acquisition. All
brokers (5/5) indicated a generally positive investor sentiment. However, respondents questioned
the validity of such assessments by commenting that share prices still generally do not increase
because of local market inefficiency and asymmetric information (2/5). Two respondents (2/5)

further stated that not all announcements cause positive reactions because of Malta’s small and
inefficient market.

154
 Journal of Accounting, Finance and Auditing Studies 8/1 (2022): 141-160

The last question to brokers asked whether local M&As signify positive shareholder value. Most
brokers (4/5) answered that positive shareholder value is created if supported by good figures
and if M&A coincides with a positive vibe of the general market. One particular broker
specifically commented that the only issue locally is that it takes time for prices to react to M&A
as “the market does not internalise new information in the share price immediately”.
4 Discussion
4.1 Growth as the Main M&A Driver
Inevidently, companies believed that M&As are critical to corporate growth strategy since all
interviewed acquiring companies aimed for a growth strategy as their main objective behind
M&A.
In fact, this growth motive seemed to have been reflected in financial results as worked out by
the researcher, since M&As made a considerable impact on their respective companies’ EBITDA
Growth. Furthermore, Growth’s significance was also highlighted by coreps as this measure was
perceived by them to benefit more from M&A activity than other aspects of corporate
performance. This could be the result of the principle of the materiality, as set out in Section 3,
of the target to the acquiring firm which was followed when determining those firms that were
to be included in the present analysis.
The fact that most acquired targets were foreign might indicate that the local market poses
constraints to further growth by the acquiring local company. Therefore, growing inorganically
and overseas through M&A was an effective vehicle through which companies expand their
operations and register actual growth measures in their financial statements.
4.2 Have Financial Results shown Improved Financial Performance post-M&A?
Despite the impact of M&A on Growth was considerable, very few firms actually experienced
improvements in ROA, OCF and Cost-to-Revenue measures. Such findings are contrary to those
by Lau, Proimos and Wright (2008) who found post-M&A improvements in profitability, cash
flows, efficiency and financial gearing amongst acquiring firms.
It can be argued that those firms which performed successfully had certain common
characteristics. Those companies which managed to achieve higher profitability were also the
ones showing effective operational cost control as well as sound financing strategies.
4.2.1 Profitability as the True Success Measure
The average deteriorating ROA position of the acquiring companies after the M&A implies that
the simple average increase in profits for all companies did not keep pace with the increased
capital employed by the business ventures under analysis. This highlights the challenge to
improve or even maintain asset utilisation post-acquisition. An increase in ROA is crucial to
prove to shareholders that their financial resources are being used in the best way possible to
maximise their own wealth. As long as shareholders’ return is not maintained or improved,

155
 Journal of Accounting, Finance and Auditing Studies 8/1 (2022): 141-160

questions arise on whether management is employing shareholders’ funds in the best way
possible. The achievement of higher ROA post-acquisition seems to be time-consuming and
several years may have to pass for the combined assets to start operating as efficiently as
possible and realise higher profitability.
4.2.2 Increased Operational Efficiency
Research findings also revealed that companies experiencing lower Cost-to-Revenue ratios
from the year of acquisition onwards, implying improved operational efficiency, were the same
ones which achieved higher ROA measures during the same periods in consideration. This
indicates that improved cost containment might be one key factor for improved shareholders’
return. Similar to ROA, it is very challenging for cost control to be evident in the first post-
acquisition years since it could take a number of years until the two combined firms benefit
from any shared costs and realise operational synergies. Moreover, such synergies may
potentially be more challenging whenever the target is located overseas.
4.2.3 Sound Financing Decisions
M&A success also seems to depend on management’s ability to determine the best financing
method of acquisition for the benefit of the company. Debt financing is not necessarily a wrong
decision, as long as the company earns enough operating income to be able to make interest
payments. Indeed, as shown in Section 4.1, when considering those companies being financed
by debt which improved their income gearing, in spite of their reliance on a higher gearing,
they also managed to improve their ROA and Cost-to-Revenue dynamics. In such successful
cases, income gearing improved because EBIT grew substantially. It is management’s role to
identify the respective companies’ most ideal financing method and be confident that interest
payments arising from debt financing will not deteriorate EBIT. Otherwise, as proven by
results, debt financing is detrimental to the financial performance if no sufficient EBIT is
earned from which interest payments have to be made.
However, one must still exercise caution with further debt financing, since increasing the
gearing ratio even further poses adverse implications upon a company’s ability to manage risks
that a decline in demand for a firm’s output might generate.
4.3 Was the Market Reaction a Good Indicator of M&A Success?
Results indicated that investors did not show any statistically significant market reaction within
the short-term. This is probably attributed to elements of illiquidity and inefficiency which
characterise the equity market in a small economy like Malta’s. Contrary to market efficiency
assumptions posed by Sitthipongpanich (2011), the MSE is limited in terms of size and depth.
Indeed, observed stock prices may not fully and immediately reflect all information available to
investors.
This market limitation was also mentioned by brokers when they were asked about local
investor sentiment upon announcement of an M&A. One particular respondent further

156
 Journal of Accounting, Finance and Auditing Studies 8/1 (2022): 141-160

commented: “Many Maltese listed companies are family owned, thus only a small proportion of
shares are traded in a free-float manner.” This makes it even more difficult for the market to
internalise any new public information in the share price.
4.3.1 Positive Reaction only appeared within Wider Time Windows
Positive financial gains over the wider time windows indicate that investors took the new public
information with positive sentiment, but it took a considerable number of days, specifically 26
days around the announcement, for that positive response to be reflected in the share price. This
probably occurred due to the domestic market’s limitations in relaying changes in any firm’s
economic prospects on to the firm’s share price.
The general positive sentiment might imply that since the local market is quite inactive, M&A
announcements are perceived as a major event around which period, prices tend to overreact.
In fact, one stockbroker suggested that the shallow level of daily trading tends to push the
domestic equity market to overshoot share price rises.
Positive market perceptions of M&A’s are not a prevailing belief in the literature. M&A literature
provides a vast array of studies on shareholder wealth arising from M&A, the results of which
seem inconsistent. Among the studies indicating shareholder loss of value upon M&A are those
by Subeniotis et al. (2011).
4.3.2 Tendency for the Market to be Off-track
It is noteworthy that positive ARs exhibited over wider time windows contrasts with the actual
shareholder value registered in the financial statements. Local investors may have raised
expectations of future financial gains resulting from M&A activity. Yet, financial indicators
including ROA, OCF and Cost-to-Revenue ratios have not shown added company value pre vs
post-acquisition.
These findings highlight the possibility that the market may not always be a good indicator of
the actual M&A success registered in the financial statements. One plausible reason for this
occurrence might be that share prices may include excessive market sentiment hype generated
through overestimated synergy expectations.
4.4 Perceived Value vs Financial Results
Coreps’ perceptions of the M&A impact on the financial performance were more optimistic than
the researcher’s workings of actual financial performance. Moreover, brokers’ assessment of
acquiring firms’ financial performance generally converged with those of the researcher. This
indicates a high degree of objectivity exercised by both the brokers and by the researcher in their
assessments, while coreps’ relatively optimistic views on the perceived value probably emerged
due to their intrinsic bias in favour of their respective companies’ M&A activity.
4.5 Factors Contributing to the Success/Failure of M&A Activity
Coreps’ insights shed light on certain traits which add the likelihood of M&A success. This implies
that management should exercise crucial importance to well-executed pre- and post-M&A

157
 Journal of Accounting, Finance and Auditing Studies 8/1 (2022): 141-160

stages.
Firstly, the alignment of M&A within the corporate strategy should be taken seriously by
management such that well-developed strategic plans specify how to widen the product/service
portfolio. Such strategies help the firm act proactively to any changes in the business segment in
which it operates.
Coreps also considered due diligence to be crucial for M&A success. Effective due diligence can
identify potential issues just before the deal closes so that any issue which affects target
valuation is identified. In fact, inadequate due diligence was also identified by brokers as one of
the reasons for target overvaluation and consequently, M&A failure.
Moreover, operational considerations such as well-executed integration was identified as crucial
but may also be potentially challenging to achieve. Indeed, the integration process might cause
major cultural differences, especially in cross-border deals. As stated by one respondent: “When
the target is run by people of a different culture and work ethic across different time zones, cultural
shock will occur.” Human resources can be one of the most unpredictable elements of an M&A,
and in these circumstances, there is the risk that people from different cultures do not bond well
together.
5 Conclusion

The M&A deals which exhibited evidence of value creation possessed certain common
characteristics. Companies which have registered increases in shareholders’ rate of return in fact
tended to be accompanied by enhanced operational efficiency and sound financing decisions.
However, the attainment of improved results following M&A is proved to be quite challenging
and time consuming to realise in practice. Overall, although M&As managed to achieve growth
potential, operational efficiency suffered, indicating that the attainment of a smooth
consolidation process seemed to consume a considerable management effort. In other words,
the theoretical positive impact of M&As on shareholder value tends to be elusive for the larger
number of companies analysed in this study. This could easily be the case if target companies
need major enhancements before being integrated with the acquiring company.
Furthermore, the local equity market reaction around M&A announcements was not a good
indicator of M&A success. Indeed, initial market reactions, which tended to be positive,
contrasted with less optimistic actual results registered yearly. It is likely that this positive
market sentiment could have originated from the shallow level of trading in the MSE, causing
prices to overshoot upon such announcements.
It also turned out that certain key factors, namely the need for a focused strategic plan, the
importance of an effective due diligence and a strong management that can push successful
integration, add the likelihood of M&A success. It all depends on managerial expertise to

158
 Journal of Accounting, Finance and Auditing Studies 8/1 (2022): 141-160

recognise the importance of these issues while avoiding exertion of any over-enthusiasm upon
the deal.
References

Burnie, D. A., Hurtt, D. and Langsam, S. A. (2005) ‘Are Bigger Acquisitions always Better?’,
Journal of Corporate Accounting & Finance, 16(2), pp. 31–38. doi: 10.1002/jcaf.20086.

Burt, S. and Limmack, R. (2003) ‘The Operating Performance of Comapnies involved in

Acquisitions in the U.K. Retailing Sector, 1977-1992’, Advances in Mergers and Acquisitions,
2, pp. 147–176.
doi: 10.1016/S1479-361X(03)02007-6.

DePamphilis, D. M. (2011) Mergers and Acquisitions Basics: All you Need to Know. Oxford:
Elsevier. doi: 10.15713/ins.mmj.3.

Grigorieva, S. and Petrunina, T. (2015) ‘The Performance of Mergers and Acquisitions in

Emerging Capital Markets : new angle’, Journal of Management Control. Springer Berlin
Heidelberg, 26(4), pp. 377–403.
doi: 10.1007/s00187-015-0219-9.

Healy, P. M., Palepu, K. G. and Ruback, R. S. (1992) ‘Does Corporate Performance Improve after
Mergers?’, Journal of Financial Economics, 31(2), pp. 135–175. doi: 10.1016/0304-
405X(92)90002-F.

Khanal, A. R., Mishra, A. K. and Mottaleb, K. A. (2014) ‘Impact of Mergers and Acquisitions on
stock prices: The U.S. ethanol-based biofuel industry’, ScienceDirect, 61, pp. 138–145. doi:
10.1016/j.biombioe.2013.12.004.

KPMG (2016) U.S. Executives on M&A: full speed ahead in 2016.

doi: 10.1126/science.1118229.

Lau, B., Proimos, A. and Wright, S. (2008) ‘Accounting measures of operating performance
outcomes for Australian mergers’, Journal of Applied Accounting Research. Emerald Insight,
pp. 168–180. doi: 10.1108/09675420810919720.

Linn, S. C. and Switzer, J. A. (2001) ‘Are Cash Acquisitions associated with Better
Postcombination Operating Performance than Stock Acquisitions?’, Journal of Banking &
Finance, 25(6), pp. 1113–1138.
doi: 10.1016/S0378-4266(00)00108-4.

Mahate, A. A. and Sudarsanam, S. (2003) ‘Glamour Acquirers, Method of Payment and Post-
acquisition Performance: The UK Evidence’, Journal of Business Finance & Accounting,
30(1–2), pp. 299–342.

Martynova, M., Oosting, S. and Renneboog, L. (2006) The Long-Term Operating Performance of
European Mergers and Acquisitions, SSRN Electronic journal. doi: 10.2139/ssrn.944407.

Rahman, M. and Lambkin, M. (2015) ‘Creating or destroying value through mergers and
acquisitions: A marketing perspective’, Industrial Marketing Management. Elsevier, 46, pp.

159
 Journal of Accounting, Finance and Auditing Studies 8/1 (2022): 141-160

24–35. doi: 10.1016/j.indmarman.2015.01.003.

Sitthipongpanich, T. (2011) ‘Understanding the Event Study’, Journal of Business
Administration, pp. 1–10.
Available at: http://www.jba.tbs.tu.ac.th/files/Jba130/Article/JBA130Thitima.pdf

Subeniotis, D. N. et al. (2011) ‘Empirical Examination of Wealth Effects of Mergers and

Acquisitions: the U.S. Economy in Perspective’, Journal of Financial and Analysis, 24(2), pp.
30–38.

Thanos, I. C. and Papadakis, V. M. (2011) ‘The Use of Accounting-based Measures in measuring

M&A Performance: A review of five Decades of Research’, Emerald Group, 10(January), pp.
105–121.
doi: 10.1108/S1479-361X(2012)0000010009.

Zaremba, A. and Płotnicki, M. (2016) ‘Mergers and Acquisitions: Evidence on Post-

announcement Performance from CEE Stock Markets’, Journal of Business Economics and
Management, 17(2), pp. 251–266.
doi: 10.3846/16111699.2015.1104384.

160