The Impact of M&A on Performance : Alternative Measures of Rates of Profit

Previous studies of the impact of M&A on performance have employed a range of measures of “profitability” or “rate of return”. Sometimes they have provided little in the way of rationalization; and sometimes the most appropriate measures have not been deployed for testing the chosen hypothesis, or supporting the final inferences. Here we explore a range of measures, their relation one to another, and caveats to their use in assessing operating efficiency or in monitoring the gains to shareholders. We discuss the profit margin, the return on net assets, the return on equity, earnings per share, and the total shareholder return.We show that the reported change in margin following M&A will, other things equal, overstate any improvement in operating performance where the M&A increases vertical integration. We analyse the difference between the accounting return on net assets and the accounting return on equity, examining the impact of associated changes in capital structure and/or tax arrangements: we report a consequent tendency for the return on equity (and earnings per share, but not the return on net assets) to overstate any improvement in operating performance after M&A. We describe the difference between the accounting return on equity and the total shareholder return, exploring the impact on the latter of changes in stock market perceptions of the combination's prospects