An empirical investigation of recent acquisition activity in the UK

Abstract

This thesis is concerned with acquisition activity in the UK and, specifically the prediction of takeovers. This is an important area for research for three reasons. Firstly, acquisition activity involves a small number of companies but creates very large sums of money. Secondly, acquisition activity can alter the composition of a company or an entire industry very rapidly making it a valuable tool for business. Lastly, there are many different topics within this field, allowing for a wealth of empirical analysis. A considerable amount of early research was limited to observation leaving some theories with little empirical backing. In addition, many earlier papers do not consider economic conditions. Recently the UK has experienced a boom and a recession. Both of these events may have effected acquisition activity and will be incorporated into this study. This thesis tackles several issues concerning acquisitions. Firstly, it deals with the level of acquisition activity and determines whether this behaviour is random or predictable. If it is predictable it should be possible to model this behaviour using appropriate indicators. The second issue is the prediction of takeovers identifying the companies likely to become involved in acquisitions. This study incorporates both accounting data and macro-economic factors. Finally, there is an analysis of acquisition benefits, considering the impact on share prices. The findings here suggest that the level of acquisition activity is predictable. However, in a boom it rises to an unprecedented level, demonstrating bubble-like properties. The empirical work concerning the prediction of acquisitions suggests that takeovers increase firm efficiency and remove poor managers. Furthermore, acquiring companies seek expansion and increased investment opportunities. Examining macro-economic conditions suggests funding and cash flow are important when acquiring in a boom, whilst productivity and market protection are vital in a recession. Finally, it appears that the target firm shareholders benefit irrespective of the outcome of the takeover.