The determinants of positive long-term performance in strategic mergers: Corporate focus and cash

Using a sample selection and benchmarking methodology designed to more accurately assess merger-related changes in corporate focus, we find a significantly positive relationship between corporate focus and long-term merger performance. Focus-decreasing (FD) mergers result in significantly negative long-term performance with an average 18% loss in stockholder wealth. 9% loss in firm value, and significant declines in operating cash flows three years after merger. Mergers that either preserve or increase focus (FPI) result in marginal improvements in long-term performance. These results are consistent with many corporate focus studies, suggesting that merger studies finding opposite results are the result of measurement error. A positive relationship between changes in focus and long-term performance continues to hold after controlling for other variables. A continuous measure of focus change indicates that the extent of focus changes is significant. Every 10% reduction in focus results in a 9% loss in stockholder wealth, a 4% discount in firm value, and a more than 1% decline in operating performance. Cash-financed FPI mergers exhibit the best, and stock-financed FD mergers the worst, long-term performance. Tests of subsample time periods show that the focus change measure is significant in both time periods, indicating that the extent of corporate focus changes is the more important measure of corporate focus or diversification. (C) 2003 Elsevier B.V. All rights reserved.