Value creation in pharmaceutical mergers

by MacDonald, John A., Ph.D., CAPELLA UNIVERSITY, 2010, 104 pages; 3398325


Mergers continue to be a popular method to supplement organic growth by pharmaceutical companies in an effort to achieve the critical mass and portfolio reach necessary to compete on a global scale. Studies done have concluded that mergers are effective methods of improving company performance, but in many cases do not meet post-merger expectations. As a result, there is a need to evaluate a broader set of factors that may influence pharmaceutical merger outcomes.

The intent of the study is to determine whether improved shareholder value is correlated with financial performance based on merger announcement stock price (as a factor measuring expected performance) and post-merger operating cash flows (as a factor measuring realized performance). The research study hypothesis seeks to determine if these factors impact merger success and shareholder value in the pharmaceutical industry.

Conclusions are drawn from the study variables that a significant correlation exists between abnormal stock returns during the time of merger announcement and positive changes in operating cash flows in the post-merger period. These findings indicate that positive market reaction to a merger announcement is often reflected in increased cash flow returns for the combined company post-merger, translating to enhanced shareholder value.

Additionally, important information was generated from the independent study variables. Product innovation alone is not predictive of merger outcomes, but when combined with other factors may predict a company's ability to translate technology into patentable inventions and new revenue, creating shareholder value. Production efficiency benefits larger versus smaller pharmaceutical companies in leveraging operational efficiencies over less efficient target companies, enhancing shareholder value. Portfolio alignment on a total and therapeutic level positively impacts merger outcomes and shareholder value. Post-acquisition scale creating a larger combined enterprise becomes value-creating if achieved in a timely and cost-effective manner. Buyer acquisition and business integration experience plays an important role in merger success and value creation.

While the study discusses specific factors that influence pharmaceutical merger success and shareholder value, it also identifies other factors and opportunities for further research impacting merger outcomes and shareholder value for companies planning strategic growth through mergers and acquisitions.

AdviserKenneth N. Granberry
Source TypeDissertation
Publication Number3398325

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