Impact of Diversification in Mergers and Aquisitions on Bidder’s Value in Emerging Markets

In this paper, I examine the market’s ability to correctly assess the future change in the acquirer’s operating efficiency for diversifying and non-diversifying mergers. Data on transactions is drawn from the Capital IQ database. The sample consists of 141 transactions that are conducted by corporations from emerging markets between 2000 and 2012 (12 years). There were three main hypotheses: 1) increase in diversification positively affects the company’s operating efficiency; 2) the market on average is able to correctly predict the future change in operating performance due to the merger; 3) the relationship between market reaction and change in future operating performance is insignificant for the sample of diversifying deals. Evaluation of two models using OLS regression shows that the first hypothesis is rejected while the second and the third hypotheses are confirmed. Thus, the market is able to predict a change in company’s operating efficiency after the merger, but it has difficulties in assessing this change for firms that increase its diversification as a result of the transaction.