Impact of cross-country mergers and acquisitions on EBITDA margin

By Ashni Walia and Priya Chetty on December 6, 2019

Mergers and acquisitions are activities undertaken by businesses for its advantages such as:

  • wider geographical presence,
  • consolidation of operations,
  • technological up-gradation,
  • economies of scale and,
  • improving profitability.

It has a number of effects as far as the financial performance is concerned. The previous article established the impact of mergers and acquisitions (M&A) activities on the acquiring firms’ operating cost. Dataset containing the values of 100 M&A deals from Europe and Asia from 2007-2017 was chosen. It was found that in the pre-merger period leverage ratio had significant impact on the operating cost while in post-merger period, geographical expansion and R&D innovation had significant impact on the operating cost.

In this article, the impact of M&A on the acquiring firms’ EBITDA margin is tested. EBITDA (Earnings before interest, tax, depreciation and amortization) is the financial measure that is used for a variety of analytical purposes. However, the primary purpose is to provide a measure for the raw operating earnings of the business (Luciano, 2017). In this article quantitative analysis using regression is applied to the dataset to show the acquirer’s pre-merger and post-merger EBITDA margin performance.

Proposed hypothesis

In order to examine the impact of mergers and acquisitions on the EBITDA margin of the firms, the following hypothesis is prepared:

H0: There is no effect of cross -country mergers and acquisitions on EBITDA margin in the period 2007-2017.

The data set is divided into two periods.

  1. The time period t-1 represents the pre-merger period and,
  2. the time period t+1 represents the post-merger period.

All data was specific to the acquiring firms only.

Impact of geographical expansion on EBITDA margin in the pre-merger period

The dependent variable is EBITDA margin and the set of independent variables include:

  • size of the firm
  • geographical expansion
  • R &D innovation
  • leverage ratio.

The following table represents the regression results of the acquirer firm before the M&A deal took place. It is represented by ‘t-1’.  The results were obtained through STATA. The results are represented below.

Dependent variableIndependent variablesCoefficientP-valueR2 – valueAdjusted R2-value
EBITDA MarginSize of firm0.7555 0.895 0.72150.6932
 Geographical expansion3.5242 0.026    
 R&D innovation7.41250 0.452    
 Leverage ratio0.6528 0.7852    

Table 1: pre-merger performance (t-1)

R square and the adjusted R square values are 0.72 and 0.69 respectively. This indicates that the independent variables explain about 69% variation in the dependent variable. This means that the model is quite good enough to explain variation in the dependent variable (Sarstedt and Mooi, 2014).  Thus, there is a probability that the null hypothesis will be rejected.

The results clearly indicate that only geographical expansion has a significant impact on EBITDA. This is because the ‘p’ value of geographical expansion (0.026) is less than the significance value of 0.05. The other variables such as size of the firm, R&D innovation and leverage ratio has P-value greater than 0.05 indicating a non-significant impact on the EBITDA margin.

The coefficient of geographical expansion indicates that with one unit of increase in the geographical expansion, the EBITDA margin increases by about 3.52 units. (White, 2019) showed that as the firm expand geographically and widen their reach their EBITDA margin also increases positively.

Impact of M&A on EBITDA margin

The dependent variable is EBITDA margin and the set of independent variables include:

  • size of the firm
  • geographical expansion
  • R &D innovation
  • leverage ratio.
  • Deal size
  • Industry relatedness

The following table represents the regression results of the acquirer firm after the merger & acquisition deal took place.

Dependent variableIndependent variablesCoefficientP-valueR2 – valueAdjusted R2 -value
EBITDA marginSize of firm 3.52412 0.425 0.7525 0.7125
 Industry relatedness 4.041252 0.504    
 Deal size 0.3561 0.105    
 Geographical expansion 4.4807 0.624    
 R&D innovation 5.2369 0.352    
 Leverage ratio 3.425 0.000    

Table 2: post-merger performance (t+1)

R square and the adjusted R square values are 0.75 and 0.71 respectively. This indicates that the independent variables explain about 71% variation in the dependent variable. This means that the model is quite good enough to explain variation in the dependent variable (Mooi, 2014). This means that there is a probability that the null hypothesis that there is no impact of merger/acquisition on EBITDA will be rejected.

The regression results for the post-merger performance indicate that only the leverage ratio has a significant impact on the EBITDA margin of the firm. This is because the ‘p’ value of only leverage ratio (0.000) is less than the significance value of 0.05. The other variables such as the size of the firm, industry relatedness, deal size, geographical expansion and R&D innovation have a ‘p’ value greater than 0.05. This indicates a significant impact on EBITDA.

The coefficient of leverage ratio indicates that with one unit of increase in the leverage ratio, the EBITDA margin increases by about 3.42 units. Akhtar (2012), in his article, provides the relationship between leverage ratio and the EBITDA margin. The study specifies that firms with a higher EBITDA margin will opt for a higher leverage ratio in order to improve their financial performance. Bienz, (2016), supported the following results and showed that firms that had a higher EBITDA margin, the stakeholders and firm had a positive experience in terms of profit margins.

EBITDA an important indicator of the financial health of a company

The EBITDA margin is a crucial indicator of the financial well-being of a business. Firms need to maintain to this financial ratio in order to provide the benchmark of earnings. In this study, the pre-merger period the geographical expansion led to an increase in EBITDA margin while in the post-merger period it was the leverage ratio that impacted the EBITDA margin. Therefore, in the post-merger period, the firms’ position to pay off their obligations with their assets greatly determine their EBITDA.

References

Ashni Walia
 

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