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Babcock Graduate School of Management Wake Forest University
WINSTON-SALEM, N.C. - Increased corporate value over the long term and an increasing rate of divestitures and spinoffs in the not-too-distant future are likely products of 1998's wave of mergers, according to two professors at Wake Forest University's Babcock Graduate School of Management.
Research conducted by Sherry L. Jarrell indicates that approximately two-thirds of merged companies perform significantly better over the long term than they would have had they remained independent. Jarrell, an assistant professor of finance and economics at the Babcock School, has examined 130 corporate mergers completed from 1973-85. She gauged how those merged companies performed during a three-to-six-year period following their merger using what she considers a more reliable measure of benchmark performance than has been employed in previous merger studies. "Because we are unable to predict which particular mergers will generate value and which will not, the public policy message this research sends to policymakers is clear," Jarrell says. "It is best to permit mergers to continue relatively unabated so that society may enjoy the benefits from the two-thirds of mergers that will add value to social wealth."
Michael D. Lord, an assistant professor of management at the Babcock School, said another product of the merger mania could be an increasing rate of corporate divestitures and spinoffs as companies determine which parts of an acquisition to keep and which to sell. Already, a large number of spinoffs and divestitures are occurring involving companies that have grown too big and diversified -- largely through past mergers and acquisitions, he said. "Amid the current deal-making frenzy, few people are bothering to ask what really are the true, effective levels for economies of scale and scope and where do diminishing returns set in," Lord says. "Bigger isn't always better."
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More information on Wake Forest University's Babcock Graduate School of Management is available on the World Wide Web at www.mba.wfu.edu.
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