Exploring a Path between Market Valuation, Gross Domestic Product and Number and Value of Announced Mergers & Acquisitions in the U.S.: 1985-2013

Abstract
This paper indicates that there is much that needs to be done in order for us to be able to understand the relationships that currently exist between the activities in our economy and the climate that exists for merger and acquisition activities. What was found is that there generally is that value will be influenced by the number of transactions that occur. This is a logical finding based on the fact that when there is a greater amount of transactions that happen in general, there will generally be a rise in value. Future work should focus on understanding industrial and organizational factors that will have a role in the nature of the impact that there will be on the performance of mergers and acquisitions over the course of time.
Introduction
Mergers and acquisitions are one of the more complex and economically difficult activities that firms will take on. Approximately 80% of mergers and acquisitions will fail to produce an added value for organizations that undertake these activities, however they are still activities that are pursued. The concept of adding value through the performance of mergers and acquisitions is a tenuous idea however, because there are market factors that are external to the merging or acquiring firm that could lead to there being the perception of there not being value added to the transaction. For this reason, research should be performed in order to understand the role of the overall economy in understanding the value of mergers and acquisitions. It is currently expected that the value of transactions for mergers and acquisitions in the U.S. for the year ending 2014 will be just north of $1.5 billion. This is on track to be relatively flat with merger and acquisition performance in the U.S. over the course of the past 5 years. About 9,000 transactions are expected this year, the highest amount since 2007. With mergers and acquisitions on the rise in the U.S., it is perhaps more urgent than at any time this decade to understand the role of economy in predicting the value of economic transactions performed by firms.
The issue of the relationship between economic strength and the performance of mergers and acquisitions is one that has not been investigated with a great deal of rigor. There is a paucity that exists in the current amount of literature that exists relating to the topic. As there is a dearth in research that has focused on this dimension of the economic questions surrounding the performance of mergers and acquisitions, a gap is filled through the performance of academic study. This research fills that gap by understanding if there is statistically significant influence on the performance of mergers and acquisitions through the strength of the economy.
As valuation of mergers and acquisitions is a vital part of the merger and acquisition process, it is important to develop an understanding of what factors will significantly influence the performance of this activity. This paper has the objective of developing this understanding of the valuation of mergers and acquisitions. Fulfilling this purpose will give practitioners of mergers and acquisitions an understanding of factors to take into account when judging the value of the performed merger or acquisition. In addition, the scholarly gaps filled through this research will indicate whether further academic study should be performed on overall academic performance or if other dimensions should be investigated in order to understand this issue in a more robust manner.
When looking at the nature of the problem surrounding merger and acquisition valuation, there are multiple factors that can potentially play a role in the valuation of a firm or in the value of a merger or acquisition. Even the method of measuring the value of the merger or acquisition can play a part in determining whether it has been successful. The discounted cash flow is typically a key tool in understanding the value of a merger or acquisition. This is the method that was used for the predicted outcome in this research of the value of mergers and acquisitions in a year. This is only valuation of it however, and there needs to be an understanding of the factors that can predict valuation in order to understand the significance of factors outside of the actual business that is being merged or acquired. For this reason, external economic factors are investigated as a means of understanding the role of the overall economy in understanding the performance of mergers and acquisitions by firms from 1985-2013.
Research Questions
1. Does year-to-year stock market value as measured by the Dow Jones Industrial Average significantly relate to the value of transactions?
2. Does Gross Domestic Product significantly relate to the value of transactions?
3. Does year-to-year stock market value as measured by the Dow Jones Industrial Average significantly relate to the number of transactions?
4. Does Gross Domestic Product significantly relate to the number of transactions?
5. Does the number of transactions significantly relate to the value of transactions?
6. Can a path model be designed that links economic performance to the performance of mergers and acquisitions?
Hypotheses
H1o: Year-to-year stock market value as measured by the Dow Jones Industrial Average does not significantly relate statistically to the value of merger and acquisition transactions at .05.
H1a: Year-to-year stock market value as measured by the Dow Jones Industrial Average significantly relates statistically to the value of merger and acquisition transactions at .05.
H2o: Gross Domestic Product does not significantly relate statistically to the value of merger and acquisition transactions at .05.
H2a: Gross Domestic Product significantly relates statistically to the value of merger and acquisition transactions at .05.
H3o: Year-to-year stock market value as measured by the Dow Jones Industrial Average does not significantly relate statistically to the number of merger and acquisition transactions at .05.
H3a: Year-to-year stock market value as measured by the Dow Jones Industrial Average significantly relates statistically to the number of merger and acquisition transactions at .05.
H4o: Gross Domestic Product does not significantly relate statistically to the number of merger and acquisition transactions at .05.
H4a: Gross Domestic Product significantly relates statistically to the number of merger and acquisition transactions at .05.
H5o: The number of transactions does not significantly relate statistically to the value of merger and acquisition transactions at .05.
H5a: The number of transactions significantly relates statistically to the value of merger and acquisition transactions at .05.
H6o: A path model cannot be designed that links economic performance to the performance of mergers and acquisitions.
H6a: A path model can be designed that links economic performance to the performance of mergers and acquisitions.

Mergers and Acquisitions
The role of mergers and acquisitions as tools in organizations that are able to bring in vital resources that can then optimize performance has been a topic discussed in forensic economic literature over the course of the past few decades. Hartman (1996) indicated that there are a number of organizational factors that will impact the efficiency of a merger or acquisition. Efficiency is a key factor that will impact the value of a firm, and therefore is an important component of the merger or acquisition. His work pointed at there being influence on the efficiency of the merger coming from factors such as the economic treatment of employees and of incentives for management. While these organizational factors are important in understanding the impact that the merger or acquisition will have on valuation, what this work is missing is a discussion of economy-wide factors that will have an influence on the value of a merger or acquisition. Connor (2008) approaches the penumbra of this in his discussion of the value of regulation on activities such as pricing as being an antecedent to the frequency of merger and acquisitions increasing, however his work does not approach the issue of the valuation of these activities increasing with the performance of the economy as a whole.
This is something that is hinted at however by Christiansen and Ewald (2013) in their paper on the discussion of mergers in the scope of competition and competition law. Their paper indicated that the use of forensic economics in the decision making involved in the task of mergers and acquisitions is valuable, and that there needs to be a robust consideration of factors when deciding on business activities such as this. This idea is backed up by Heminway (2010) who pointed to there being a need for a focus on behavioral economics when looking at the topic of mergers and acquisitions. Kwoka & Pollitt (2010) point to even greater diversity in factors as they had indicated that even within single sectors there are a number of extra-organizational factors that will go into the valuation of a merger and acquisition when performed by an organization. These factors all indicate that it is necessary to look beyond the bounds of the organization when understanding the valuation of a firm’s merger or acquisition as there is a vibrant array of factors to consider within the scope of the different ways which firms will be valued after the performance of this activity
Economic Influence of GDP and Equity Market Performance on Mergers and Acquisitions
While prior research indicates that there are a number of factors that go into the performance of the merger and acquisition that will make the activity more efficient and effective, there has been scant amounts of research that have actually approached the topic of the merger and acquisition in such a way that there could be a robust understanding of the value of extra-organizational factors. When looking at macro-economic factors that may be influencing the value of the merger or acquisition, Calderon, Loayza & Serven (2004) looked at foreign direct investment as it became a form of financing for investments in the 1990s that was increasingly depended on. Their work pointed out that there was a relationship that existed between foreign direct investment and the performance of mergers and acquisitions. While this suggests that the economy of the nation may have an impact on mergers and acquisitions occurring, their research did not approach the question of valuation. In a meta-analysis of the factors that will influence the creation of value in mergers and acquisitions, Datta, Pinches & Narayanan (1992) pointed out that factors beyond the control of the merging organization will commonly play a pivotal role in the creation of wealth and value for merging organizations.
Work performed by Golbe & White (1988) looked at historical data in order to determine if there were trends that existed in the performance of mergers and acquisitions. Their work found that there were relationships between time periods and the performance of mergers and acquisitions. Their work however did not seek to go further and to implicate economic performance of the country as being a factor that would facilitate this happening beyond indicating that there was a “rise in the mid-1950s’ a more gradual rise in the late 1950s and early 1960s, and then a sharp rise in the late 1960s…” (Golbe & White, 1988, p. 269). Hinting however at there being a relationship between the performance of the merger and acquisition and economic performance of the country as a whole, Shimizi, Hitt, Vaidyanath & Pisano (2004) found that the economic surge of the 1990s shared a relationship with the increased number of mergers and acquisitions that were being performed at the time. Taking this relationship into consideration, there is reason to believe that examination of data will indicate that there is a strong relationship that exist between the value and performance of mergers and acquisitions and the performance of the economy as a whole. There is therefore a high degree of rationale that supports the performance of empirical study on the topic of economic performance of the country and the performance and valuation of mergers and acquisitions in the U.S.
Methods
Data regarding the number of announced mergers and acquisitions, year-to-year stock market growth and gross domestic product for each year from 1985 to 2013 was used in order to understand how it is that the stock market and overall economic growth as measured by the gross domestic product would influence the number of and value of merger and acquisition transactions. Data regarding Mergers and acquisitions had been collected from the IMAA Institute (2014), while data regarding the gross domestic product was collected from U.S. Bureau of Economic Analysis (2014) and stock market performance was measured by performance on the Dow Jones Industrial Average (2014). The IMAA points to there being volatility in the number of transactions and the nature of value of merger and acquisition transactions over time (Graph 1). The controls of median income, consumer price index and unemployment number were collected as well. The collected data was assembled onto an excel sheet in order to organize the data. The data was then transferred to an SPSS worksheet in order to perform simple and multiple regression analysis on the data. The data was then examined using a bootstrap procedure at 2000 samples. This was done in order to perform mediation analysis on the data to test hypotheses. SPSS AMOS was then used in order to understand if adequate model fit could be found in a path exploring the data.
Graph 1 – A graph of mergers and acquisitions (1985-2014) (IMAA, 2014).


Results
Results from statistical analysis of the data indicate that there are few significant relationships that are observed in the correlation matrix. This indicates that there is little reason to assume that the factors of GDP increase or DJIA increase have an impact on the value or number of merger and acquisition transactions that are performed by organizations. There is a highly significant relationship that exists between consumer price index and the number of transactions and value of transactions that organizations will engage in. Further, there is a negative and significant relationship that exists between unemployment and merger and acquisition value. Based on these findings, it is appropriate to explore the value of these variables further in the discussion of findings. With regard to the tested hypotheses of this research, there is little support given to the hypotheses of this paper. Based on findings regarding merger and acquisition value and transactions as well as consumer price index and unemployment, mediation was performed through the use of bootstrapping at 2000 simulated samples and an alternative data model that emerged from the findings of the research was tested. Overall, the findings of this research that emerged in this paper were much different than what had been hypothesized.
Table 1 – Correlation Matrix, Mean and Standard Deviation (N=29).



Hypothesis Testing
H1o: Year-to-year stock market value as measured by the Dow Jones Industrial Average does not significantly relate statistically to the value of merger and acquisition value at .05.
Results of the research indicate that hypothesis H1o is to be accepted. This is because the findings were found to be insignificant at .05 (p>.05, β=-.13). Year-to-year stock market value increases are only able to explain .8% of variance in merger and acquisition value (F=.218). This finding suggests that change in the stock market from year to year will not influence the value of mergers and acquisitions.
H2o: Gross Domestic Product does not significantly relate statistically to the value of merger and acquisition value at .05.
The GDP was not found to be a significant influencer of the value of merger and acquisition transactions. For this reason, hypothesis H2o is accepted. The findings of this hypothesis are insignificant (p>.05, β=-.13). This means that increases in overall economic production will not increase the value in mergers and acquisitions. Only 1.8% of variance is explained by GDP increase in the value of mergers and acquisitions (F=.495).
H3o: Year-to-year stock market value as measured by the Dow Jones Industrial Average does not significantly relate statistically to the number of merger and acquisition transactions at .05.
There is insignificant amounts of significance that exist between year-to-year increases in the DJIA Industrial Average and the number of merger and acquisition transactions performed (p>.05, β=.05).Hypothesis H3o is therefore accepted. This finding indicates that changes in the stock market will not influence the appetite of firms to engage in merger and acquisitions. A miniscule amount of variance is able to be explained in the number of merger and acquisition transactions performed through the use of the DJIA, with DJIA explaining only .2% of variance in merger and acquisition transactions. This is surprising because changes in the stock market and value of firms will commonly make firms targets of mergers and acquisitions. Perhaps future study could investigate this on a firm-by-firm basis to understand this further.
H4o: Gross Domestic Product does not significantly relate statistically to the number of merger and acquisition transactions at .05.
The GDP was found to not significantly relate to the number of merger and acquisition transactions at .05, therefore the hypothesis H4o is accepted (p>.05, β=.23). Only 5.2% of variance is explained through the use of this measurement. What this means is that there is a lack of significance that exists in the model (F=1.48).
H5o: The number of transactions does not significantly relate statistically to the value of merger and acquisition transactions at .05.
There is a strong degree of significance that exists in the model tested for H5o (p<.01, β=.81). It was found that the number of merger and acquisition transactions performed was able to explain 66.1% of the value of merger and acquisitions performed. This finding suggests that merger and acquisition value can be strongly influenced by merger and acquisition behavior. This model is able to explain a great deal in terms of merger and acquisition value (F=52.59).
H6o: A path model cannot be designed that links economic performance to the performance of mergers and acquisitions.
Due to a lack of significance among multiple findings, it was not adequate to test for model fit among insignificant relationships.
Discussion
Bootstrapping of the relationships between consumer price index and merger and acquisition transactions with merger and acquisition value did not indicate that merger and acquisition transactions mediated the relationship between consumer price index and merger and acquisition transactions. A model was designed to determine the value of modeling significant relationships that may have an influence on the value of mergers and acquisitions. This model was not found to have a strong degree of model fit.

Figure 1. A figure of the relationships that exist between observed variables.
Conclusion
In closing, while there are few significant findings that emerged in this research, the findings expressed in this paper indicate that there is much that needs to be done in order for us to be able to understand the relationships that currently exist between the activities in our economy and the climate that exists for merger and acquisition activities. What was found in this research is that there generally is that value will be influenced by the number of transactions that occur. This is a logical finding based on the fact that when there is a greater amount of transactions that happen in general, there will generally be a rise in value. Future work should focus on understanding industrial and organizational factors that will have a role in the nature of the impact that there will be on the performance of mergers and acquisitions over the course of time.
References
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