The impact of M&A strategies on the operating performance and investments of European IPO firms

We study the post-initial public offering (IPO) operating performance of 245 European firms that completed merger and acquisition (M&A) transactions after going public, examining the asset profitability (return on assets) and cost efficiency (return on sales). Controlling for performance persistence, we find that acquiring IPO firms do not generally perform differently from their non-acquiring counterparts. However, they exhibit a significant drop in operating performance that is common to most IPO firms: this latter effect is stronger with larger investments in M&A activity compared to company assets and with larger increases in operating working capital. We find the worst operating profitability when acquisitions are also paid with stock. When the acquisition is intended for business diversification, there is no impact on asset profitability, but we find a decrease in operating margins. Interestingly, we find no substitution effects between M&A activity and other alternative investments. Investments in intangible assets and capital expenditure by acquiring IPO companies are not significantly different from those by non-acquiring IPO firms.