The impact of life cycle stage on firm acquisitions

• DOI: https://doi.org/10.1108/IJAIM-02-2019-0027
• Pages: 223-241
• Published date: 02 March 2020
• Date: 02 March 2020
• Author: Daniel Ames,Joshua Coyne,Kevin Kim

The impact of life cycle stage on

f‌irm acquisitions

Daniel Ames

College of Business, Bryant University, Smithf‌ield, Rhode Island, USA, and

Joshua Coyne and Kevin Kim

Department of Accounting, University of Memphis, Memphis, Tennessee, USA

Abstract

Purpose –The purpose of the authors’research study is to identifythe impact of life cycle stage on f‌irm

acquisitions.

Design/methodology/approach –The authors use a series of empirical databases to identify

characteristics of acquirers and their targets. The authors then use logistic regressions and joint tests to

identifysignif‌icant differences between decliningand non-declining acquirers.

Findings –The authorsf‌ind that declining acquirers are more likely to pursuediversifying acquisitions and

to pay for the acquisition with stock considerations. Acquisitions by declining acquirers result in positive

abnormalreturns initially, but post-acquisition returnsare negative.

Research limitations/implications –The authors’primary limitation is their data, which only

includespublic acquirers and targets, and runs from January 1, 1988to December 31, 2010.

Practical implications –The authors’research suggests that regulators, stakeholders and prospective

stakeholders should consider the life cycle stage of an acquiring f‌irm in setting expectations about

motivationsfor and likely performance subsequent to the acquisition.

Originality/value –The authors’paper is the f‌irst to consider the effect of f‌irm life cycle stage on the

motivation and subsequent success of an acquisition. Given the tremendousimpact to shareholders of such

signif‌icant transactions, understanding the acquisition process more completely is important to capital

marketsparticipants.

Keywords Acquisitions, Mergers, Firm life cycle

Paper type Research paper

1. Introduction

Researchers have long been interested in mergers and acquisitions (Bresman et al., 1999;

Harford, 1999;Moelleret al.,2004;Morcket al.,1990;Shleifer and Vishny,2003). Topics have

ranged from whether mergers add or destroy value (Harford, 1999;Shleifer and Vishny,

2003), how much knowledge is transferredor lost (Bresman et al.,1999), whether managerial

objectives drive acquisitions (Morck et al.,1990) and how acquisitions differ based on size

(Moeller et al., 2004).However, one basic and important factor of acquisitions has so far been

excluded in the literature: the life cyclestage of the acquirer.

Broadly speaking, f‌irms can be divided into two categories –growth and decline.

Intuitively, growing f‌irms facea unique incentiveset compared with f‌irms in decline.In this

paper, we investigate how acquisitions by declining acquirers differ from acquisitions by

non-declining acquirers on various dimensions, specif‌ically, we compare the likelihood of

diversif‌ication,types of payment, characteristics of target and market reaction.

As an earlier version of this paper is based on Kim’s dissertation, he thanks his dissertation

committee Derek Oler (chair), William Buslepp, and Denton Collins for their direction and input.

Firm

acquisitions

223

Received27 February 2019

Revised13 June 2019

Accepted14 June 2019

InternationalJournal of

Accounting& Information

Management

Vol.28 No. 2, 2020

pp. 223-241

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-02-2019-0027

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1834-7649.htm

Declining f‌irms are different from non-declining f‌irms along several dimensions

(Anthony and Ramesh, 1992;Dickinson, 2011). These differences may also affect their

acquisition process. Declining f‌irms have low sales growth, which may indicate a lack of

competitive advantage in their respective industries. This lack of competitive advantage

may lead managers to diversify their core business, branching into other industries. Also,

prior studies argue thatmanagers try to enter new businesses to assure the survival oftheir

f‌irm and avoid losing theirjobs (Donaldson and Lorsch, 1983;Shleifer and Vishny, 1988). At

the same time, managers of a declining acquirer should be more careful spending cash

because they also have negative cash f‌lows from operating activities. We hypothesize that

declining acquirers are more likelyto diversify their businesses through an acquisition, and

that declining acquirersare less likely to offer cash consideration, offeringstock instead.

We f‌ind that acquisitions by decliningacquirers signif‌icantly differ from acquisitions by

non-declining acquirers along various dimensions, including the likelihood of

diversif‌ication, types of payment, characteristics of target f‌irms and market reaction.

Consistent with our expectations, declining acquirers are more likely to diversify their

business through an acquisition, indicating that managers of declining acquirers use an

acquisition for diversif‌ication purposes more often than non-declining acquirers. Moreover,

declining acquirersare less (more) likely to offer cash (stock) consideration.

We f‌ind that declining acquirers have signif‌icantly higher abnormal stock returns than

non-declining acquirers during the announcement period but have signif‌icantly lower

abnormal stock returns than non-declining acquirers during the post-acquisition period.

Furthermore, diversifying declining acquirers mostly drives negative abnormal stock

returns of declining acquirers in the post-acquisition period. Consistent with prior studies,

these results suggest thatthe market does not fully anticipate the effects of the acquisition at

its announcement and adjustsits initial valuation as more information becomes availablein

the interim and post-acquisitionperiod.

The paper proceeds as follows. Section 2 develops our hypotheses. We discuss our data and

research methodology in Section 3. Section 4 presents our results, and Section 5 concludes.

2. Hypothesis development

According to the DePamphilis (2010),there are two reasons to acquire a f‌irm outside of one’s

immediate industry. First, a diversifying acquisition helps the acquirer reduce its cost of

capital (Hann et al., 2013). Second, a diversifying acquisition helps the acquirer change its core

business. Prior studies argue that f‌irms may pursue diversifying acquisitions when they can do

better in other industries with their unique resources (Matsusaka, 2001;Gomes and Livdan,

2004). However, a third motivation for diversifying acquisitions may exist that is not in

shareholders’best interest. Donaldson and Lorsch (1983) argue that managers try to diversify

their businesses into new industries to assure the survival and continuity of the businesses

even when it destroys shareholder value. Morck et al. (1990) indicate that a diversifying

acquisition of public f‌irms is an action induced by the managers’needs. This motivation may

be particularly important in cases in which information asymmetry is great (Lim et al.,2015).

Managers of a declining acquirer may search for opportunities to expand their

business into other industries because they struggle to compete within their own

industry. Dickinson (2011) shows that a declining f‌irm has lower earnings per share,

lower return on net operating assets, lower prof‌it margin and lower growth in net

operating assets than non-declining f‌irms. Shleifer and Vishny (1988) argue that

managers have incentives to move into other industries when their businesses suffer.

Thus, we expect that declining acquirers have high incentives to jump into other

industries by acquiring a target:

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