The impact of merger and acquisition activity on listed innovation driven businesses : Insights from the pharmaceutical and biotechnological industries

Abstract

An innovation deficit may exist due to cycles of Mergers and Acquisitions (M&A) as managers of innovation driven business use a strategy of buying growth at the expense of innovation. It is recognised that innovations are vital for economic growth and society depends on innovations from industries such as pharmaceutical and biotechnology as a matter of public health. Empirical studies exist that explain why companies engage in M&A and the impact thereof on company performance but with a non-specific industry focus. The impact of M&A on innovation driven businesses is less well documented. This identified a gap in the knowledge in this area and to address it, this research examined specifically the effects of M&A activity on innovation-driven businesses as proxied by the pharmaceutical and biotechnological industries. A quantitative, causal design using a time series approach was employed for the research. Specifically event study methodology, which measured the impact of a specific event on the value of a company and a joint set of variables, was the main tool used for this research. Cumulative average abnormal returns (CAARs) were calculated to assess the impact of the M&A event on the value of the companies. An accounting study was used to determine abnormal operating financial performance. Parametric tests, non-parametric tests, and descriptive statistics were used to assess variables, namely research and development intensity, sales performance, and cost efficiency. Secondary company data used for the analysis such as data on the M&A transactions, stock prices, and data from company financial statements was sourced mainly from the Zephyr database. A sample of 35 transactions in the period 2005-2015 was selected based on purposive sampling. Parametric (paired-sample t-tests, matched pairs t-tests, paired sample correlations) and non-metric tests (Wilcoxon Signed Rank Sum tests and the Friedman test) were performed at the 95% confidence interval. A bootstrapping technique was used to test the statistical significance of the results of the CAARs. This research concluded that post the transaction the acquirers shareholders earn positive but statistically insignificant returns in the short-term; up to one year post the transaction the acquirers face a significant decline in research and development intensity and are less cost effective while the operating financial performance and sales performance, are not significantly impacted.