An empirical investigation of the effects of merger and acquisition on firms\u27 profitability

Economic advantage and competitive edge is the name of the game. Business combination is one proven and tested method by companies wanting to grow and gobble up a larger market share. The emerging business scenario created an additional burden to the already struggling corporations\u27 existence, in almost all types of industry, which is due to the ever increasing demand for innovative strategies. To survive the dog-eats-dog world of competitiveness, a number of these players engage in business combination - wherein two or more companies incorporate into a single accounting entity. This study is considered a causal and correlational research, which aims to determine the relationship of the mergers and acquisitions to the firm\u27s profitability. It is a quantitative study that measured the effects of mergers and acquisitions on return on assets and return on equity of the companies. Besides knowing the relationship, this study also obtained an estimate of the possible impact of the independent variable to the dependent variables. This study covered all the listed companies in the Philippines Stock Exchange for the years 2006 until 2010. This covered companies from the different sectors of the economy, which comprise of 30 companies in the financial sector, 75 firms in the industrial sector, 39 businesses classified as holding firms, 39 companies in the property sector, 54 businesses in the service sector and 22 companies in the mining and oil sector. The research made use of two linear regressions to analyze the effect of having a merger or acquisition on the profitability of the companies. Two separate regressions are needed because profitability would be proxy by two different but widely used variables: the return on equity and the return on assets ratio. Since the study covered the entire publicly listed companies in the Philippines for the period 2006 until 2010, this essentially means that panel data was used in the study. Hence, the appropriate panel analysis was conducted. Findings suggest that there is significant negative relation of merger and return on equity, having a merger or acquisition to return on equity implies that most mergers and acquisitions do harm to the financial well-being of the companies, rather than good. Furthermore, merger and acquisition provide an insignificant relation to the return on total assets, as evidenced by the insignificant p-value. As a result, the finding of this variable provides empirical evidence that having a merger and acquisition does not affect the return on assets ratio of companies in the Philippines