Mergers and Acquisition and Firm Growth

Investigating Restaurant Firms

Reason of the study

BACKGROUND
M&A has been increasingly used in restaurant firms
78

M&A in 2003. & number increased to 112 in 2007.

There are two types of firm growth strategies Internal ( Organic) growth through own strengths & external (M&A) growth by buying another business

Motivation
Prior M&A studies
focused on investment returns to examine changes in shareholder value Very little focus on firm growth little general methods were used Event Window Approach was used (results were too limited to fully understand the various effects of M&A on firm performance).

So the researcher got motivation to conduct this study by using more general methods and to fill this research gap by conducting this study.
This study investigated the post M&A growth patterns in comparison to nonM&A growth patterns using restaurant firms.

Objective and Significance Objective :

Objective of this study was to investigate the effects of M&A on firm growth in comparison with non-M&A firms.

Significance:
Useful for firms considering M&A Outcomes of study contributes to both industry and academic discussions.

LITERATURE REVIEW
The researcher has studied many research papers regarding the:

Effects of M&A Post-M&A integration Firm size effect on post-M&A firm growth

Effects of M&A: While studying effects of M&A the researcher found that event studies using a short term window reflect only stock market expectations for the event so it maynot accurately capture the economic impacts of M&A. Post-M&A integration:

Firm size effect on post-M&A firm growth: Researcher found that past studies have shown a negative relationship between firm size and firm growth and the negative relationship is not linear

METHODOLOGY
Data :

The data used in this study was collected from the COMPUSTAT and the SDC platinum using SIC 5812 (eating places). Data covers 28 years (1980-2007) This study also used net sales growth to gauge firm growth.

Sample size:

The total sample for Analysis included 347 U.S restaurant firms. A total of 3248 observation were used and 714 M&A cases were identified for analysis. Sample firms were selected only if they survived at least for five years.

Models
Three different model were proposed in this study

Sales growth model Panel data model Wilson & Morris model

1. Analysis of this study is based on a sales growth. model Various techniques used in
this model are

First differenced generalized method of moments Sargan & hansen test Arellano and bond test

A central assumption of First differenced generalized method of moments (GMM)system estimate is that the instruments are exogenous.
If the estimation is exactly identified, detection of invalid instruments is impossible. But if the system is over-identified, test statistics for the joint validity of the moment conditions all out of the GMM framework. The validity of the instruments can be tested with the Sargan or hansen test of over-identifying restriction. Hansen test is more generalized test than the Sargan test.

2. This study also applied a panel data model with fixed effects that was estimated with GMM system estimator. One-step estimator- homoskedastic error. Two-step estimator- heteroskedasticity- consistent standard error.

One-step estimators are less efficient than two- step estimators. So this study used the two-step estimator.
3. Wilson and Morris Model was Third Model used in this study, which test the effect of M&A and firm size groups on sales growth rate.

RESULTS

Over 28 years, 714 M&A were observed in sampled restaurant firms. Out of those 714 M&A ,

93 were conducted by small firms, its size group were 11.79%.

124 by medium-small firms, its size group were 15.3%.

185 by medium-large firms, , its size group were 23.2% , and

312 by large firms, , its size group were 36.8%.

The statistics suggested that larger restaurant firms have been more involve in M&A activities than smaller restaurant firms. The results suggested that the effect of M&A on firm growth continued even in the years following M&A execution, but the effects disappeared two or three years after M&A. And during or after the third year of M&A the growth patterns of M&A firms and non-M&A firms were the same.

M&A affect sales growth in the short run when the merger processes take place.
In longer run a lot of other effects of M&A on growth could be ambiguous.

CONCLUSION

This study focused on the impact of M&A on firm growth by examining the sales growth rates of restaurant firms upto five year after M&A. This study provide useful information regarding post-M&A performance according to time frame and acquirer firm size.

The study found that duration of M&A effects in terms of sales growth might not be long lasting.

LIMITATIONS
Restaurants

firms as a sample were used so results can not be generalized to other hospitatility industries.

Sales

growth were used to measure firm growth.

SUGGESTIONS
M&A does not have a long lasting effect on firm growth. So M&A should not be used for growth but for creation of other types of values such as:

Market power enhancement Risk minimization Cost efficiency

FUTURE RESEARCH
Future research can investigate the effects of M&A on other firm performances:

Profitability Cost reduction or efficiency

Cost efficiency can be achieved faster than sales growth and profitability might improve later than sales growth.

FLAWS
In this study only sales growth was considered as firm growth.

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