Key predictors of Australian listed company post-acquisition performance

Studies have attempted to show that revenue stream diversification resulting from acquisition explains the differences observed in subsequent company performance. Despite more than thirty-five years of research, however, the results remain inconclusive. This study examines both company and industry performance following domestic and foreign acquisitions in an attempt to resolve this uncertainty. An examination is made of the relationship between performance of the acquiring company and its industry before and after acquisition, making particular note of risk level, regulatory constraint and technical intensity. This results in measureable predictors of performance following acquisition. Consistent with prior research, multiple regression analysis was used to test models of performance prior to and after acquisition. The study period, 2000 to 2006, was selected to reflect the current macro-economic climate and all acquisitions of Australian listed companies within that period were included. To demonstrate appropriateness of the method and suitability of the data, the model commonly used by prior studies was first tested using recent Australian listed company data. The results of this test suggest superior performance after acquisition when the target company is related by revenue stream to that of the acquirer, compared with a target company unrelated by revenue stream. Suggesting that this model may be incomplete, a small body of literature examines pre-diversification performance characteristics in an attempt to explain post-diversification performance differences. In an extension to this research, the present study shows that diversification achieved through acquisition is not significant in predicting post-acquisition performance for a recent sample of domestic and foreign-market acquisitions by Australian listed companies. It also considers regulatory constraint, technology asset seeking, risk and monopoly power as predictors of performance after acquisition. Operational differences when companies enter foreign markets have largely been ignored in the literature to date. Production and cognitive impediments suggest a reduction in performance, whilst foreign-market operations may also provide mitigation against revenue cycle fluctuations, including industry and currency. Additionally, anti-competitive legislation may provide a motive for diversification outside the jurisdiction of the domestic market authority. Similarly, technology intensive companies may utilise foreign-market acquisition to asset-seek the latest technology in order to maintain or better their market position. The findings of this study suggest that revenue stream diversification does not explain differences in performance after acquisition, rather, it is determined by the performance of the acquirer before acquisition. In addition, high levels of risk and monopolistic power are associated with high performance. However, this excludes the use of acquisition to establish foreign market operations where an interim decrease in performance can be expected, suggesting the presence of time-limited organisational impediments associated with experience level. An expected decrease in performance for members of regulated industries was not found and, when considered with the finding that high performance is associated with monopoly power, it suggests that government attempts to ensure competitive markets may be ineffective