Australian mergers and acquisitions since the 1980s: what do we know and what remains to be done?

1. Introduction

Three studies published in the mid-nineteen-eighties heralded a surge of research on merger and acquisition (M&A) activity in Australia. The share market studies of Walter (1984) and Bishop, Dodd and Officer (1987) concluded that takeovers help allocate capital to more valued uses. (1) In contrast, McDougall and Round (1986) found, using accounting measures, that merged firms perform worse than they did pre-merger and worse relative to matched non-merging firms. The divergent conclusions highlight the key issue in M&A research: does an active M&A market lead to a more efficient allocation of resources?

This survey covers subsequent published work on the Australian M&A market. (2) For convenience, studies are grouped by their relevance to the following four questions: What motivates M&As? How are gains/losses distributed among acquiring and target firms? What is the impact of takeover regulation on the distribution of gains and losses? And, are expectations realised? The aim is not to provide a comprehensive critique, space constraints preclude that, but to identify areas where progress has been substantial, to note issues that remain unresolved and indicate what appear to be under-researched questions that are capable of being addressed in future work. In short, we aim to provide a guide to current knowledge that will be useful to both industry participants and prospective researchers in this area.

The following precis serves as a guide to the review. In answer to what motivates M&As, we conclude from the evidence described in section 2 that acquisitions are initiated by higher-performing firms seeking to extend their relatively good performance. The question that remains moot is whether bidding firms' typically positive pre-acquisition performance disposes their managers to be over-confident and thus either select ill-advised targets or over-pay for them. Section 3 reviews the immediate gains and losses to acquiring and target-firm shareholders from M&A activity. The evidence is unequivocal: target-firm shareholders gain substantially when their firms receive a takeover bid. The abnormal price gains are directly related to the bid, since they dissipate if the target firm is not ultimately taken over. For acquiring-firm shareholders, takeovers typically herald a period of share-market under-performance, a finding at odds with the value-adding hypothesis. At least part of the poor performance of the acquiring firms may be due to takeover regulation that imposes inordinately high costs on bidding firms. The evidence in support of this point is discussed in section 4. Arguably, the ultimate test of the value created by M&A activity is whether the expectations that prompted them are realised in the long term. The relevant evidence is discussed in section 5. A key point that emerges is that the view of many financial economists that share-market event studies provide a more reliable, tractable means of investigating the economic consequences of M&A activity than accounting-numbers-based studies is misguided. Both sets of studies are plagued by (now) widely appreciated methodological difficulties that preclude broad-brush conclusions about the net effect of takeover activity. We close our review by suggesting a range of research questions in section 6 that are likely to be among the most effective in furthering our understanding of the causes and consequences of M&As in Australia.

2. What Motivates M&As?

Share-market event studies consistently find that bidding firms experience abnormally good performance in the months prior to the takeover announcement (Dodd 1976; Bishop, Dodd & Officer 1987; Brown & da Silva Rosa 1997b, 1998). Dodd (1976) observes that the finding of positive abnormal returns in the pre-bid period is consistent with the hypothesis that '[differentially efficient] firms experience abnormally good performance and have surplus funds to invest, and look to takeovers as a profitable avenue of investing those funds' (p. 20). On the other hand, Roll (1986) notes these results are also consistent with the hubris hypothesis: '[o]ne would expect a higher level of hubris and thus more aggressive pursuit of a target in firms that had experienced recent good times' (p. 206).

Roll's caveat is addressed in the next two sections, but reviews of target firms in the pre-bid period indicate that target firms under-perform. Brown and da Silva Rosa (1997b) find that 1,371 ASX-listed target firms earned a mean cumulative abnormal return (CAR) of -23.3% and a median CAR of -31.6% over the period [-36, -6] months relative to the bid announcement month. Interestingly, about half of Brown and da Silva Rosa's sample firms are drawn from Bishop, Dodd and Officer (1987)'s study but they do not find abnormally poor performance. (3) The reason for the difference is that Brown and da Silva Rosa control for firm size and survival. As they note, target firms are usually smaller firms

and controlling for firm size and survival will decrease the measured abnormal return to firms with smaller market capitalisation.

One potential reason that target firms under-perform is that their management is not subject to effective oversight by shareholders, perhaps because the shareholders are widely dispersed and individually lack the incentive to expend effort on monitoring. In these cases, takeovers add value by realigning the interests of management and shareholders. The 'disciplinary motive' for takeovers has been widely cited as a key benefit of an active M&A market. For instance, the Federal Government's Paper No 4 of the Corporate Law Reform Program (1997) (CLERP) contends that 'the prospect of a takeover acts to overcome the principal-agent problems inherent in the separation of company ownership and control, for example, where it is impracticable or too costly for shareholders to ensure that directors act in their interests' (1997, p. 7).

Although it may motivate some takeovers, the available evidence does not indicate that the disciplinary motive features in most takeovers. Bugeja and Walter (1995) test whether abnormal returns to the target firms are negatively associated with the target firm's performance in the pre-bid period. No relationship is found when prior share price performance is used to measure firm performance. If takeovers are used to reduce agency costs there should be a negative relationship between managerial share ownership and the takeover premium. Bugeja and Walter do not find this relationship. Their results are consistent with the findings from a comprehensive US-based investigation of the disciplinary motive by Agrawal and Jaffe (2003a, 2003b).

We have concentrated on the share market research, however the limited evidence from accounting studies is consistent with the share market based findings. McDougall and Round (1986) review the pre-bid performance of acquiring firms in 88 takeovers that occurred between 1970 and 1981 in the retail, transport and industrial sectors. McDougall and Round find that acquiring firms have higher profits pre-takeover and less profit variability relative to their target firms. They also find, in common with the share market studies, that acquiring firms are much larger than their targets, on average. Avkiran (1999) focuses on four mergers in the banking sector in Australia following the beginning of deregulation in December 1983 when the dollar was floated. He finds the acquiring banks in Australia responded more effectively to deregulation and were efficient than their target banks in the pre-bid period.

The finding that acquiring firms' pre-bid performance is better than their target firms' when accounting measures are used may be challenged on the basis that the acquiring firms might have 'managed' their earnings upwards. Stronger evidence that target firms are indeed underperformers is documented in Eddey and Taylor (1999). They test the hypothesis that directors who reject a bid use accrual accounting to increase current earnings and thus support their claim that the bid, relative to earnings, is inadequate and that directors who accept a bid use accrual accounting to decrease current earnings. Eddey and Taylor find that although firms for which directors recommend bid acceptance display negative unexpected accruals (4) as predicted, the results are not statistically significant. However, firms for which directors recommended rejection of the bid showed significantly negative unexpected accruals, contrary to the managed earnings hypothesis. Eddey and Taylor conclude that the firms are, in fact, relatively poor performers, a conclusion also supported by comparison of the firms' performance with industry benchmarks.

In sum, the evidence to date is supportive of M&A activity being initiated by differentially efficient firms. The disciplinary motive for takeovers is arguably oversold. The research designs adopted to date have made it difficult to distinguish if takeovers are symptomatic of hubris or part of the normal investment process. Future studies might consider controlling for corporate governance features that are associated with managerial hubris. For instance, do firms with boards comprising a majority of independent directors make better takeover decisions?

3. Distribution of Gains and Losses Among Acquiring and Target Firm Shareholders

An early concern in the M&A debate was whether target firm shareholders benefit. The influence of this concern is manifest in the design of Australian takeovers legislation, which aims to ensure target shareholders have equal opportunity to share in takeover premiums, have relevant information made available to them, and are given ample time to consider the merits of offers made. It is not obvious that the legislation facilitates the efficient operation of the M&A market since its provisions reduce the private benefits of searching for information about targets (Brown & da Silva Rosa 1998). Nonetheless, the evidence is unequivocal. In the event of an offer being made, target firm shareholders benefit considerably. The first Australian share market study, Dodd (1976), reports a mean abnormal return of 25% to target firms in the month of announcement that is consistent with the results from later, more comprehensive studies by Walter (1984), Bishop, Dodd and Officer (1986), Anderson, Haynes, and Heaney (1994), and Brown and da Silva Rosa (1998). The Anderson, Haynes, and Heaney (1994) study is noteworthy in that it documents a higher abnormal return to smaller target firms but is unable to determine whether this is accounted for by subsequent takeover bids, lower liquidity and/or greater information asymmetry for small firms.

As the Anderson et al. study indicates, the exceptional performance of the target firms is not independent of the bids made for them. Bishop (1991) and Aitken and Czernkowski (1992) find that target firms' shares are revalued upwards on disclosure of a substantial shareholding investment by prospective bidders. Bishop observes that the upward revaluation is most likely due to the 'market assessing the probability of an impending takeover offer rather than a reassessment of the underlying value of the target firm'. Murray's (1994) analysis of the abnormal trading volume in 60 ASX target firms over the pre-bid period indicates market speculation rather than insider trading accounts for the run-up. Further evidence that target firms are not undervalued per se comes from Bishop, Dodd and Officer (1986) who find that the share price of a target firm that is not the target of a subsequent, successful takeover attempt falls back to its pre-bid level. The share price of a target that receives a successful subsequent bid experiences an additional significant positive revaluation. Interestingly, Hutson (2000) documents that the market is able to anticipate the arrival of a subsequent bid prior to expiry of the initial bid.

The finding that the exceptionally high gains experienced by target company shareholders are dissipated if the bid does not succeed puts the onus on the target's directors to manage the bid process effectively since substantial value is at risk. Eddey and Casey (1989) observe there are two plausible hypotheses on how directors arrive at a recommendation on receipt of a bid. The shareholder welfare hypothesis (SWH) predicts that directors will act in the best interest of shareholders when contesting a bid, the arguments in support being their fiduciary requirement to so, reputation effects, and the prospect of facing litigation if they do not. The director welfare hypothesis (DWH) predicts that directors will place their own interests ahead of shareholders when faced with a takeover bid. The principal argument for the DWH is that directors lose power, prestige, and the value of firm-specific human capital if they accept an offer, and accordingly they are likely to resist offers regardless of the consequences for shareholders. Eddey and Casey (1989) conclude, from an analysis of 400 takeover bids for ASX listed companies made between 1972 and 1985, that directors generally act in the interest of shareholders when evaluating bids.

A strength of Eddey and Casey's (1989) analysis is that it is based on a large sample which reinforces their study's external validity. Nevertheless, case studies have the advantage of facilitating insights into processes that are impractical to investigate with large samples. Merrett and Houghton's (1999) study of the actions of the directors of Foy & Gibson Ltd in response to a takeover bid by G.J. Coles & Coy in 1955 is a case in point. Merrett and Houghton conclude from their study that, 'at a time when regulation was low and directors had ample opportunity to engage in adverse selection and moral hazard ... the directors [of Foy & Gibson] worked hard to maximize the bid price by auctioning the company despite having little equity exposure themselves' (p. 223). Interestingly, Merrett and Houghton go on to claim that 'the actions of these persons [i.e. the directors of Foy & Gibson] cannot be understood unless they are placed in the wider commercial and social networks of Australian business in the 1950s and the prevailing ethical values' (p. 240). Their observation is a salutary reminder of the influence of social mores on corporate behaviour.

Given that takeover bids are welcome news to shareholders of target firms, the issue is whether the same applies to acquiring firms. The abnormal returns earned by target firms may reflect either a share of the value increase from the acquisition expected by the bidder or, if hubris motivated the bid, a transfer of wealth from the acquirer.

Announcement period returns consistent with the hubris hypothesis are found in Walter (1984) and Casey, Dodd and Dolan (1987). Walter (1984) analyses the weekly returns to 271 Australian bidders who succeeded in acquiring their target firm. He finds that the bidders experienced an average CAR of 28.2% over the period [-100, 0] weeks relative to the offer announcement week. However, for the announcement period, [-1,+ 1] weeks, the average CAR declined by 1.3%. As Walter points out, 'this adjustment is consistent with the hypothesis that identification or confirmation of a firm as an offeror is, on average, viewed as a disappointment' (p. 84). A similar conclusion may be drawn from Casey, Dodd and Dolan's (1987) study which investigates all the takeovers in Bishop, Dodd and Officer's (1986) study; takeovers which occurred between January 1981 and June 1986. Consistent with the U.S. studies for the same period, they observe a negative CAR of -2.42% for the two-day announcement period and -5.99% for a 15-day window. Brown and da Silva Rosa (1998) report a mean abnormal return, after controlling for firm size, to their sample of 635 acquiring firms of 5% but this is earned over a seven-month period centered on the takeover bid announcement month and, arguably, Walter's (1984) and Casey, Dodd and Dolan's (1987) provide a more precise estimate of the market's reaction. (5)

The post-bid outcome returns earned by firms that failed to acquire their targets are also difficult to reconcile with the value-increasing hypothesis. Walter (1984) and Bishop, Dodd and Officer (1987) document that positive abnormal returns to unsuccessful bidders continue to accrue well after the announcement month. Walter's sample of 97 unsuccessful acquisition attempts made in the period 1966-72 displayed a 3.2% abnormal return for the period covering one week prior to the announcement through to the announcement week. In Bishop, Dodd and Officer's (1987) sample, unsuccessful bidders experienced large positive abnormal returns well before the takeover offer and, in contrast to successful bidders, continued to earn abnormal returns after the announcement month. For the seven-month period centered on the announcement month, successful bidders' CAR averaged 6% while the CAR of unsuccessful bidders averaged 10%. We return to this issue when discussing whether expectations of takeovers are realised.

Although the share price performance of acquirers around the bid period is difficult to reconcile with the value-increasing hypothesis, this is not so for 'corporate raiders', that is, persons or companies with a reputation for frequently engaging in takeover bids. DeChow (1987) and Casey, Dodd and Dolan (1987) investigate the share price changes for targets and investors around the period when designated Australian corporate raiders make acquisitions. DeChow finds that the cumulative abnormal return (CAR) to the target shareholders in the sample over a six week period beginning four weeks before the first public announcement is 14.93%. Casey, Dodd and Dolan (1987) use the same sample of raiders identified by DeChow to compare the returns generated by raiders and non-raiders. Based on their sample of 47 'raided' takeovers and 53 'non-raided' takeovers, Casey, Dodd and Dolan report that across a 15 day event window, 'the abnormal returns across all firms [acquirers and targets] are approximately equal regardless of whether a raider is involved or not' (p. 211). However, the targets of raiders do not do as well, on average, as the targets of non-raiders. Casey, Dodd and Dolan posit that the ability of raiders to appropriate a larger share of the gains from takeover might well be why they are termed 'raiders' even though, on average, slightly higher total abnormal returns are generated in takeovers initiated by raiders. Bishop (1991) also finds that 'raider' firm share prices are revalued upwards when they are revealed as a substantial shareholder in a prospective target but this not true for other potential acquirers.

Eddey (1991) attempts to identify how the seven corporate raiders studied by Dechow (1987) and Casey, Dodd and Dolan (1987) are different from other acquirers. He finds that raiders typically bid for larger companies, which is consistent with the empire building hypothesis and which also might account for their bids receiving greater publicity. However, he finds no evidence that 'corporate raiders, more so than other acquirers, target lowly geared companies and/or highly liquid companies ... in other words, except for size, the financial characteristics of raided and non-raided targets do not differ very much. [Further] only raiders' toehold and target directors' accept or reject recommendation holds significant explanatory power over the outcome of a bid by a corporate raider' (p. 169).

Interestingly, Eddey (1991) notes that 'since this paper was written in 1989, the corporate raider activities of all seven controversial investors have ceased. Two raiders have died (Adler and Holmes a Court), three have encountered financial difficulties (Bond, Elliot and Spalvins), Brierley has retired and Lee is no longer in Australia' (Note 1, p. 169). With the passing of the seven prominent raiders, research and wider public interest in the activities of so-called 'corporate raiders' has also dropped considerably. The view that the takeover activities of certain individuals and their associated companies are deserving of special attention or concern is no longer widely held.

4. Takeover Regulations and the Distribution of Gains and Losses

We noted earlier that takeover regulation explicitly aims to protect the interests of target firm shareholders. Several studies have investigated how the regulations function in this respect. Eddey (1993) reports on the impact of independent experts' reports, which target firms are required by Australian company law to furnish to their shareholders when the bidder is entitled to 30% or more of the target company's shares, and/or the bidder and the target have one or more common director between them. The requirement was introduced as a result of concern that the bidders in such cases might exploit their close relationship with the target firm to offer a lower takeover premium than otherwise. Based on his analysis of the outcomes from 370 cash-based bids made between 1988 and 1991 in which 170 expert's reports were produced, Eddey concludes that the premia offered in bids where an independent expert report is required are not lower than premia offered in other bids. Eddey also finds that, after controlling for the recommendation of target company directors, an expert's opinion contributes no further explanatory power to the variation in bid outcomes.

Eddey (1993) points out that while his findings are consistent with the proposition that independent expert reports protect target shareholders, they 'can also be explained as the outcome of a competitive market for corporate control' (p. 16). Brown and Horin (1986) assess the degree the Australian takeover market is competitive by testing the implication that the successful bid price exhausts all potential gains to unsuccessful bidders. They find 58 out of 72 takeovers bids for ASX firms in their sample were consistent with a competitive market on the basis that it did not pay an unsuccessful bidder to lift his bid to the successful offeror's price. Brown and Horin note that their conclusion is predicated on the assumption the estimated abnormal returns capture the potential gains from a takeover. We return to this issue when addressing our third question, are expectations realized?

Another way in which company law seeks to protect target shareholders is by requiring bidders to keep their offers open for at least one month during the formal offer period, which commences 14 days after the takeover announcement. In effect, the law forces bidders to write a free put option at no cost to the shareholders of the target company. Arguably, the requirement to stand in the market for a month and a half gives the target shareholders more time than is commercially reasonably to evaluate the merits of the offer. Hutson and Kearney (2001) provide evidence in support. They investigate the conditional price volatility on 112 of the largest takeover targets in Australia over the period 1985 to 1993 to test whether target shareholders experience significantly higher risk commensurate with the higher returns they earn. They find that target firms experience a strong tendency for their risk to decline and that 'the market plays a significant lesser role--in many cases, no significant role at all--when targets are 'in play" (p. 294). Hutson and Kearney comment that the 'regulation of acquisitions in many countries imposes excessive cost burdens on bidding firms, which may inhibit the efficient working of the market ... Regulatory reform should recognise this and focus more on improving the efficient operation of the market for corporate control' (p. 294).

5. Are Expectations Realised?

In 1978, Michael Jensen declared that 'there is no other proposition in economics which has more solid empirical evidence supporting it than the Efficient Markets Hypothesis.' (Jensen 1978, p. 95) This premise and the advent of large, tractable share price data made the event-study approach much more attractive than accounting based analysis. Dodd and Officer (1987) summarise the disadvantages of using accounting data:

(a) The effects of takeover may take years to be reflected in earnings and will likely affect earnings at different intervals of time, making aggregation of the effects difficult to analyse.

(b) Accounting practices vary substantially across companies, even in the same industry.

(c) Biases in reported accounting earnings are not necessarily self-correcting in the same way that biases in capital markets are self-correcting.

(d) Accounting for goodwill acquired in takeovers is not consistent across companies. 'In general, accounting figures are not satisfactory measures of rates of return' (p. 134).

On the other market-based approach, Dodd and Officer (1987) contend that 'share market prices and the capital market rates of return estimated from these will be unbiased estimates of the future benefits arising as a result of takeovers. Should any bias develop, then there is an opportunity for investors to capitalise on that bias by adopting profitable trading strategies. The effect of such trading strategies would eliminate the bias. Therefore, while it is possible to criticise the market's expectation of the effect of a takeover on the performance of a company in a specific instance, such criticism is not legitimate in aggregate or over extended periods of time' (p. 134).

It is a truism that shares prices reflect expectations, else they are economically meaningless. The issue is whether the prices observed and the rates of return estimated from them are sufficiently accurate and unbiased to support the inferences drawn from them. (6) Since the mid-eighties, a large number of studies have documented that acquiring firms that issue shares as consideration exhibit a significant secular negative trend in abnormal performance in the post-acquisition period. The finding is troubling because it suggests that the market systematically overestimates the benefits from mergers and prices subsequently take a considerable period of time to adjust. A competing explanation is that the methods used to assess long-run performance are systematically biased.

Brown and da Silva Rosa (1998) review post-acquisition returns to a large sample of ASX acquiring firms after controlling for a number of now-well recognised biases and issues in assessing abnormal performance over the long run, for example, the negative association between firm size and return, method of return computation, and survival bias. They find that controlling for these factors improves acquiring firms' returns to the point where there is no statistically significant underperformance. However, Brown and da Silva Rosa (1998) do not control for method of payment and it is well known that post-acquisition underperformance is associated with share based payments. Bellamy and Lewin (1992) are the first to document negative returns to Australian acquirers that make share based bids. da Silva Rosa, Izan, Steinbeck and Walter (2000) confirm that the post-acquisition negative returns to share based bids persist even after controlling for firm size, method of return computation and survival biases.

Whether market inefficiency or invalid research design accounts for the secular decline in post-acquisition returns remains unresolved however the issue highlights that the problems in using share market data to investigate takeovers may be no more tractable than those inherent in using accounting numbers.

McDougal and Round (1986) evaluate the motives for, and effects of 88 full takeovers which occurred between 1970 and 1981. All sample firms are public companies in the retail, transport, and industrial sectors which were not involved in another takeover for three years before and after the takeover examined. McDougal and Round compare the performance of the merging firms with matched firms both individually and jointly.

McDougal and Round report that: (i) bidder firms are much bigger than targets on average. Curiously, they find this inconsistent with scale economies as a motive for takeovers; (ii) bidder firms have higher profits pre-takeover and less profit variability relative to their respective target firms; (iii) post-takeover, the merged firms grow faster than their matched counterparts but the growth is not as fast as the acquirers' growth in the pre-takeover period; (iv) post-takeover profits are lower than pre-takeover profits; and (v) post-takeover leverage is higher for the merged firms--which runs counter to the prediction of a risk reduction motive. Based on these findings, McDougal and Round conclude that merged firms do worse post-takeover relative to both the pre-merger period and to the matched non-merging firms. Takeovers 'appear to have been caused by so-called managerial motives, or by a desire to develop or enhance market power' (p. 189).

Sharma and Ho (2002) observe that the accounting method adopted for takeover transactions will negatively influence earnings as goodwill on acquisition and restructuring costs are written off. They therefore incorporate both earnings and cash flow measures in their review of the post-acquisition performance of 36 pairs of Australian industrial companies that merged sometime between 1986 and 1991. In line with McDougal and Round, they find that 'on the basis of four accrual and four cash flow performance measures, corporate acquisitions did not lead to significant post-acquisition improvements in corporate operating performance' (p. 192).

Sharma and Ho's findings are consistent with those from other non-share market based studies such as: Hyde (2002) who investigates mergers in the Australian petroleum industry and finds that they are associated with a decrease in profitability and inefficiency; Avkiran (1999) who reviews mergers among Australian trading banks that occurred between 1986 to 1995 and reports that acquiring banks are more efficient pre-merger but do not maintain their efficiency post-merger; and Ralston, Wright and Garden (2001) who review the post-merger gains in technology and efficiency achieved by 31 Australian credit unions relative to non-merging credit unions and conclude that mergers are not associated with improvements in efficiency superior to those achieved by internal growth. None of the studies take into account that marginal returns to investment inevitably decrease with expansion and that the appropriate yardstick to assess whether a merger adds value is the merged entities' required rate of return, given its risk.

Notwithstanding the last point, a striking feature of the accounting based research is the consistency of results with share market based studies; both streams of research report results from the post-acquisition period that are interpreted as disappointing, although researchers using both methods emphasise the close to intractable difficulties in measuring long-run performance unbiasedly. Nevertheless, it is not just the well appreciated research method problems that suggest we are far from possessing a reliable understanding of the consequences of corporate takeovers; takeover activity is far too frequent, far too widespread and involves far too wide a cross-section of companies for it to be plausible that it is, on balance, a systematic destroyer of wealth on the scale implicit in results from studies reviewing post-acquisition performance.

6. Potential Future Research Questions

We suggest that answers to the following questions are among those likely to lead to a better understanding of the causes and consequences of corporate takeovers.

1. Do accounting-based measures of performance line up with share-market measures of performance at the firm level? This line of investigation will profit from a greater understanding of the accounting accruals undertaken by bidders and targets.

2. What is the impact of industry shocks on takeover activity? Mitchell and Mulherin (1996) document that industry shocks have potential to explain much takeover activity and its consequences. They note that just seven industries out of the 50 tracked in the US database Mergerstat Review accounted for over 50% of all takeovers in 1993 and 1994. There is no similar study in Australia. However, industry shocks might explain findings such as that noted by Hyde (2002) in his study of takeovers in the petroleum industry; both firms that were involved in takeovers, and one that was not, experienced an increase in costs even though industry concentration increased following the takeovers.

3. What is the relationship between propensity for making takeover bids and firms' corporate governance characteristics? It would be particularly interesting to see if acquiring firms that comply more closely with ASX Ltd's best practice recommendations on corporate governance (ASX, 2003) are more likely to generate increased value for shareholders from their takeover activities.

4. What happens in the share registers of bidders and targets pre and post acquisition? Do 'informed' investors realise superior returns?

5. Is there a fee premium for high-quality advisers (as per the auditing literature) and is there any evidence of specialisation?

6. Most large firms operate in more than one industry. What are the disadvantages and advantages of specialisation and diversification? Do focus-increasing mergers have different return patterns to focus decreasing?

7. What are the consequences of takeovers to other stakeholders in the merged firms, for example, directors, managers, customers, employees, and tax authorities?

8. Are leveraged buy-outs and management buy-outs symptoms or solutions to agency problems? What returns do these transactions accrue for the various participants?

(1.) Dodd (1976), the earliest share-market-based study of Australian M&A activity found results consistent with Walter (1984) and Bishop, Dodd and Officer (1987).

(2.) There has been extensive research on M&A activity in the US, UK and, to a lesser degree, Europe. Practical considerations restrict the present review to Australian research. The restricted coverage is less costly than it might seem since the Australian studies and findings are typical of those reported for the other major capital markets.

(3.) Bishop, Dodd and Officer (1987) observe that 'slightly more than half of the target firms earned positive abnormal returns over the period -36 [months] through -7 [months]. On average, the targets were not firms experiencing severe financial difficulties' (p. 60).

(4.) Eddey and Taylor (1999) define expected (i.e. non-discretionary) accruals as adjustments to cash flows required by accounting standards. Unexpected (i.e. discretionary) accruals are adjustments to cash flows selected by management, such as the method for amortizing purchased goodwill (see their footnote 13, p. 34).

(5.) Although Walter (1984) and Casey, Dodd and Dolan (1987) do not control for firm size, the impact of firm size is insignificant over narrow event-windows.

(6.) Schleifer (2000, Ch 1) provides a highly readable, succinct history of the development of the EMH and the theoretical and empirical challenges to it that have emerged over the past two decades. He observes that Jensen's claim 'about the best established fact in economics was not that outrageous' (p. 10) in light of the available evidence in 1978.

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Raymond da Silva Rosa ([dagger]) Terry Walter ([section])

([dagger]) UWA Business School, The University of Western Australia, 35 Stirling Highway, Crawley, WA 6009. Email: [e-mail]

([section]) School of Banking and Finance, The University of New South Wales, Sydney, 2052 and Capital Markets Cooperative Research Centre Limited, Level 2, 9 Castlereagh Street, Sydney NSW 2000. Email: [e-mail]