Corporate Acquisition

Journal of Business Finance & Accounting, 31(3) & (4), April/May 2004, 0306-686X
Corporate Acquisitions and the

Operating Performance of
Malaysian Companies
R. ABDUL RAHMAN AND R.J. LIMMACK*
1. INTRODUCTION
One of the issues facing policy-makers in developing economies

is to identify the extent to which they should adopt market-
based policies that are perceived as acceptable by developed
economies. One particular area in which this issue arises relates
to takeover activity. Takeover activity may be perceived as one
aspect of the market for corporate control that provides a
disciplinary mechanism on management (Jensen and Ruback,
1983). In addition the takeover market provides an exit strategy
for owner managers of growing firms. In a less-well developed
economy, however, it may not always be possible to follow a
‘liberal’ approach to takeover activity. Other policies, such as that
of transferring a greater proportion of ownership of productive
assets to the indigenous population (as with the bumiputra
policies adopted in Malaysia) may be perceived as more import-
ant.1 Even though corporate acquisition activity is relatively
* The authors are respectively Lecturer at UiTM, Shah Alam, Malaysia and Retired: formerly
Professor of Accountancy and Finance, University of Stirling, Scotland. They wish to thank
participants at the EFMA Conference, Athens, 2000 and an anonymous referee for their
valuable comments. (Paper received May 2002, revised and accepted October 2002)
Address for correspondence: R. Abdul Rahman, Head of Consultancy (Finance),
Institute of Research, Development and Commercialization Universiti Teknologi
MARA, 40450 Shah Alam, Selangor, Malaysia.
e-mail: rash@pc.jaring.my
# Blackwell Publishing Ltd. 2004, 9600 Garsington Road, Oxford OX4 2DQ, UK
and 350 Main Street, Malden, MA 02148, USA. 359
360 RAHMAN AND LIMMACK
new in Malaysia, it is a significant aspect in the growth of busi-

ness sectors and the development of the Malaysian economy.
With an increase in the level of acquisition activity, corporate
leaders need to be aware of the difficulties in achieving value
maximising behaviour in corporate acquisition decisions. It is
also important that legislators do not make hasty decisions
about the need for regulation in a field which economic theory
suggests may have the potential for major benefits in a market-
based economy.
The current study aims to contribute to the debate on takeover
activity by examining the financial performance of a sample of
Malaysian companies that made acquisitions in the period
1988–1992. Rather than focusing on shareholder wealth effects,
however, we are more concerned with identifying whether take-
overs in Malaysia lead to an improvement in corporate operating
performance. Our approach is therefore based on analysis of the
operating cash flow performance using a sample of Malaysian
companies involved in takeovers between 1988–1992.
Jensen (1984) argued that shareholders’ wealth increases in
takeover situations are derived from improved operating
performance and increased efficiency. Other authors have
identified a wide range of additional sources of potential
improvements (see for example Weston et al., 1998). Recent
research, however, has provided contradictory evidence on
the presence of gains to bidding company shareholders and
indeed on the existence of net wealth gains. This conflicting
evidence has been observed in a number of countries with
developed capital markets, including the USA, the UK and
Australia. One possible way of reconciling the contradictory
findings is to suggest that takeovers do indeed improve eco-
nomic efficiency on average, but acquirers simply pay too much
for the benefits. Researchers who have attempted to address the
question as to whether takeovers actually lead to an improve-
ment in operating performance, however, have generally found
limited evidence to support this thesis. One possible policy
argument is to propose that the onus is on advocates of takeover
activity to demonstrate that the benefits outweigh what are
perceived to be potentially harmful effects, including the devel-
opment of monopoly power. The danger in this argument for
developing markets is that politicians may favour legislation that
# Blackwell Publishing Ltd 2004

PERFORMANCE OF MALAYSIAN COMPANIES 361
limits not only the negative but also the positive aspects of
takeover activity. From the regulatory viewpoint, it is therefore
important that researchers establish a prima facie case for the
presence of operating efficiencies in takeover activity. In this
particular context it is less important to determine which group
of shareholder, if any, benefits from improvements in operating
performance.
In smaller capital markets, including Malaysia, takeovers of
private companies predominate. The opportunity for improved
efficiency that may arise from disciplinary takeovers will occur
less frequently than improvements from other potential sources
of gain, including synergistic benefits.2 The majority of research
to date has focused on takeovers of publicly quoted companies
with relatively few studies examining takeovers of privately held
firms. Recent examples of the latter, however, include studies
by Chang (1998) and Da Silva Rosa et al. (2001). The latter
two studies have concentrated on the short-run wealth impact
on shareholders of acquiring firms. Neither of these studies
addresses the more contentious issue of long-run post-
acquisition performance (Loughran and Vijh, 1997, and Lyon
et al., 1999) and both investigated takeovers in well-established
markets. The main contribution of the current study is to invest-
igate long-run post-acquisition performance of companies
involved in takeover activity in one developing market, that of
Malaysia. The selected sample, reflecting acquisitions of private
companies, allows us to test whether opportunities for gain are
present even in the absence of a disciplinary role. The method
of analysis is to examine operating performance of Malaysian
companies involved in acquisitions during the period
1988–1992. The performance metric used is based on
control-adjusted operating cash flows of the bidder and target
companies prior to acquisition and of the combined corporate
entity after acquisition. In addition, tests are undertaken to
identify the source of any change in performance.
The results reported in the current study suggest that
acquisitions in Malaysia during the period 1988–1992 lead to
improvements in the long run operating cash flow perform-
ance. The improvement in performance results from both
increases in return on sales (cash flow per dollar of sales) and
in asset turnover (sales per dollar of assets). These improvements

are not achieved at the expense of the long-term viability of

the combined firms, as they are also accompanied by an increase
in the level of capital investment. The results demonstrate that
Malaysian acquisitions do lead to improvements in operating
performance that provide the potential for benefits to bidding
company shareholders and for the economy as a whole. Both
our prior assumptions and preliminary analysis of target and
bidding companies suggest that our sample is unlikely to con-
tain many, if any, disciplinary bids. Our results are therefore
consistent with the presence of other sources of operating
improvement. One caveat that must, however, be placed on
the results is that most of the target companies in Malaysian
acquisitions and, all of the targets in the current sample are
privately owned companies. It is not possible to state conclu-
sively that the results reported here would necessarily apply to
acquisitions of public quoted companies.3
The rest of this paper is organised as follows. Section 2
summarises the recent empirical evidence. Section 3 describes
the data selection procedure and the methodology used to
compute acquisition-induced changes in performance. Section 4
presents results on changes in operating cash flow and some of its
components including return on sales, asset turnover, capital
expenditure and cash flow from operating expenses. The final
section draws conclusions from the study.
2. PREVIOUS EVIDENCE
There are two research approaches normally employed in

addressing the question of the efficiency of the takeover
mechanism. One approach is to focus on the profitability of
companies involved, using accounting data. The other
approach is to employ share price data to establish the distribu-
tion of gains and losses to shareholders. Both measures should be
related to post-acquisition cash flows, thus it might be assumed
that they would lead to consistent results.4 However, previous
studies that have used both measures suggest otherwise.
Studies based on analysis of accounting data have attempted
to assess the economic impact of acquisitions by testing for
changes in profitability of the combined firm. Most accounting-

based studies, whether based on UK or US data, tend to

lend support to the view that acquisitions do not result in
improved performance and that acquisitions are non-value
maximising to shareholders. Examples of such studies include
those of Mueller (1980), Ravenscraft and Scherer (1987), Clark
and Ofek (1994), Philappatos and Baird (1996) and Denis,
Denis and Sarin (1997) for the USA; and Singh (1971), Utton
(1974), Meeks (1977), Holl and Pickering (1988) and Dickerson,
Gibson and Tsakalotos (1997) for the UK. However, studies by
Lorie and Halpern (1970) and Lev and Mandelker (1974) based
on US data reported that merging firms perform significantly
better than non-merging firms. While these results are fairly
consistent, concerns have been expressed over the use of
accounting measures of performance, including the choice of
time period over which to measure performance and the need
to adjust for accounting effects of the takeover (Appleyard,
1980).
An alternative approach to the above focuses on security
returns together with an identification of the wealth gains or
losses to the various shareholder groups. Market-based studies
that have focused on announcement period returns tend to find
that acquisitions provide positive abnormal returns to bidding
company shareholders.5 While there remains some debate
about the long-run wealth impacts of takeovers, a recent survey
of the literature by Agrawal and Jaffe (2000) concludes that ‘the
long-run performance is negative following mergers, though
performance is non-negative (and perhaps even positive) fol-
lowing tender offers’. Magenheim and Mueller (1988), Lahey
and Conn (1990) and Clark and Ofek (1994) find negative
post-acquisition performance for merged firms in the USA.6
Only Franks, Harris and Titman (1991), and Loderer and Martin
(1992) find positive long-run post-acquisition returns. Loughran
and Vijh (1997) provide evidence that significant negative
excess returns are obtained by the shareholders acquiring
firms that made merger bids using share financing whereas
the shareholders of firms that made cash tender offers experi-
ence significantly positive excess returns over the five-year
period following acquisition.7 Agrawal, Jaffe and Mandelker
(1992) showed that the results obtained by Franks et al. (1991)
were time–specific (1975–84) and a function of the sample of

acquisitions examined.8 Agrawal et al. (1992) also reported that

acquisitions undertaken in the time period 1955 to 1987 are
followed by significant negative returns over a five-year period
after the outcome announcement date. A number of UK studies
have also reported negative long-run post-acquisition returns
for the acquiring firms, including those by Limmack (1991),
Kennedy and Limmack (1996), Sudarsanam, Holl and Salami
(1996), Gregory (1997) and Baker and Limmack (1999). Only
two papers report that acquiring firm shareholders gain in the
long-run from acquisition, Franks, Broyles and Hecht (1977)
for the brewing industry and Franks and Harris (1989), with the
latter providing conflicting results depending on the bench-
mark control used.9 In addition, Higson and Elliot (1998)
report no evidence of negative abnormal returns three years
post-acquisition for bids conducted in the period 1975–1990.
Over the period 1981–1984, however, the latter authors report
evidence of significant positive abnormal return during the two
years after acquisition. Higson and Elliot conclude that post-
acquisition returns are sensitive to the observation period.
In summary market-based studies have produced a conflict in
results between the announcement period share price reaction
and subsequent negative long-run post-acquisition behaviour.
This conflict has led a number of authors (Healy et al., 1992;
Jarrell, 1995; and Gregory, 1997) to suggest that the results may
be a reflection of methodological errors, including the use of
inappropriate control models, rather than the acquisition per
se. This view is partly reinforced by the length of time over
which the negative post-outcome returns are observed as this
appears to contradict the notion of an efficient securities market
(Ruback, 1988). Possible methodological errors include the
choice of inappropriate control models or some form of selection
bias either in the control model or the sample being examined.
Attempts to provide what are deemed to be more appropriate
models in long run studies by Franks et al. (1991) and Agrawal,
Jaffe and Mandelker (1992) in the US; and Gregory (1997),
Higson and Elliot (1998) and Baker and Limmack (1999) in
the UK, have eliminated some of the more obvious potential
sources of bias. Gregory (1997) and Baker and Limmack (1999)
have shown that the negative pattern of post-outcome abnormal
returns is not a function of size or book-to-market effects. Nor

are the negative returns found in these studies caused by

survivorship or prior performance bias. However, the continued
presence of a long run negative drift in post-outcome returns
does leave a worrying question over the appropriateness of this
particular methodology.
In summary, there is some conflict between the results
reported in short-term and long-term market-based studies.
Although there is some agreement between results reported for
long-term market-based studies and accounting-based measures
of performance, both sets of research have been subject to the
criticism of inappropriate methodology. There remains therefore
a fundamentally unresolved question of the long-term effects
of acquisitions on firm performance. In the current study an
alternative research design is adopted, which uses cash flow
analysis to measure the performance of companies involved in
takeover activity. The approach adopted is similar to that used in
studies by Healy et al., (1992 and 1997), Manson et al. (1994 and
2000), Clark and Ofek (1994), Anand and Singh (1997) and
Ghosh (1998). These latter studies provide evidence suggesting
that acquisitions are economically efficient in the long run and
therefore create the opportunity for wealth increases.
3. DATA AND METHODOLOGY
(i) Data
The current study focuses on takeovers of Malaysian companies
that were initiated and completed during the period January 1,
1988 to December 31, 1992.10 The sample period selected
provides a focus on recent acquisitions and also ensured that
sufficient pre-and post-acquisition performance data was avail-
able for our tests. A list of takeover bids was identified from
the Kuala Lumpur Stock Exchange’s (KLSE) monthly Investors
Digests. Initially, 160 proposed acquisitions, involving 160
bidders and 213 targets were identified.11 The list was then
cross-checked with the Annual Companies Handbook published
by the KLSE and the respective companies’ files in the KLSE
to identify the bid outcome. Restrictions imposed on the initial
sample are as follows:

(i) The acquiring firm must be quoted in the KLSE and

acquire more than 50% voting rights of targets in order
to create the holding company-subsidiary relationship
identified in Section 5(1)(a) of the Malaysian Companies
Act 1965. Lapsed bids are excluded.
(ii) The purchase price for the target must exceed RM5 million.12
(iii) Acquisitions involving financial firms and investment
trust are excluded because of their specific accounting
and regulatory requirements
(iv) At least two years of pre-acquisition financial data was
required for target and bidder (excluding year of acquisi-
tion). In addition five years of post-acquisition data was
required for the newly combined company.
The requirement for five years post-acquisition data stems
from the view that value increasing improvements in efficiency
might not materialise for several years (Healy et al., 1992 and
1997; Manson et al., 1994; Jarrell, 1995; and Ghosh, 1999).13
Although imposition of this requirement would potentially
have introduced a survivorship bias into the sample, no acquisi-
tion was actually excluded for this specific reason. The final
sample included 94 quoted acquiring and 113 private target
companies.14 Details of the relationship between the initial and
final sample are reported in Table 1 while size statistics are
reported in Table 2. Financial reports on the quoted acquiring
and control companies were obtained from the KLSE library
while those on non-quoted target and control companies were
Table 1
Number of Acquisitions and Final Sample by Year
1988 1989 1990 1991 1992 Total
Initial bids identified 28 49 60 44 32 213

Financial 2 5 9 2 18
Lapsed 5 9 7 6 6 33
Dormant targets 3 4 4 3 4 18
Target company accounts
not available 6 6 5 2 2 21
Non-listed bidders 4 2 6
Public listed firms 1 1 1 1 4
Final sample 13 28 34 23 15 113

Table 2
Size Characteristics of Sample of Bidders and Targets (RM’000)a
Relative Size of
Targets Bidders Target to Bidder
Mean 47,492 279,854 0.215

Median 20,120 122,611 0.134
Standard Deviation 58,194 350,135 0.580
Maximum 433,117 1,783,835 4.028
Minimum 1,267 5,495 0.103
Note:
a
Size is measured as the book value of shareholders funds (share capital plus reserves)
plus net debt less cash and marketable securities, measured at the end of the financial
year prior to the acquisition.
obtained either from the companies themselves or from the

Malaysian Registrar of Companies (ROC) in Kuala Lumpur.
The preponderance of privately owned targets in Malaysia
suggests that many of the acquisitions are likely to be agreed
bids and that these are therefore unlikely to portray the char-
acteristics of disciplinary bids. Results of prior studies based on
analysis of security returns suggest that it is the latter type of
acquisition that is most likely to produce net wealth gains.
Hence our sample is likely to exhibit some bias against a finding
of improvement in operating performance. The relatively small
size of target to bidder, reported in Table 2, is also likely to
mitigate against any finding of performance change.
Frequent or active bidders (bidders making more than one bid
in subsequent years) are included in the current study. It is
possible that acquiring firms undertaking frequent acquisitions
do so as a result of perceived benefits from earlier acquisitions.
Thus, excluding them from the sample may bias the results. We
therefore include companies that have made multiple acquisi-
tions in our sample from the date of the first takeover identified
in the period and adjust both combined firm and control firm
measures for all subsequent acquisitions. Multiple acquisitions in
the same financial year are treated as a single acquisition. If a
further acquisition is made in a subsequent year then pre-bid
performance of ‘bidder’ and control companies are based on
the combined performance of the bidder plus prior target.
Performance in the post-acquisition period is based on that of the

newly combined company while that for the control is based on a

pseudo combination that includes the additional control company.
Previous studies have adopted a variety of control bench-
marks. Healy et al. (1992), Manson et al. (1994) and Harford
(1999) use the median industry performance as their control.
Barber and Lyon (1996) and Ghosh (1998) suggest that control
firms selected on the basis of industry and size are likely to serve
as better benchmarks than median industry performance.
Ghosh (1998) argued that as large firms, on average, are more
profitable than small firms the use of industry medians as a
benchmark may introduce bias into the analysis. In the current
study industry-matched control companies were selected from
the population of non-acquiring and non-target companies.15
Bidders were also matched on the basis of size. Size matching
was also undertaken as far as possible for targets although the
absence of available information on the full population of poten-
tial controls made this more difficult. We base the definition of
size on the book value of total operating assets at the end of the
year prior to acquisition (represented by share capital plus
reserves plus total debt, less cash and marketable securities).
We were unable to match using market values as the targets
were mainly private companies.
(ii) Performance Measurement

As asserted by Healy et al. (1997), security returns around the
takeover announcement represent investor’s expectation of
acquisition benefits whereas post-acquisition cash flow performance
measures the actual benefits, if any, generated by acquisitions.
Rayburn (1986) and Bowen, Burgstahler and Daley (1987)
provide evidence that cash flows can incrementally explain
abnormal stock returns in the USA. Bowen et al. (1987) found:
that cash information is consistent with the information impounded in
security prices and also has incremental explanatory power beyond that
contained in accrual flows alone (p. 746).
The use of an operating cash flow measure also allows the

impact of the acquisition to be assessed independent of the
accounting method adopted to report the acquisition or changes
in accounting policies post-acquisition. Thus, the primary meas-

ure of performance used in the current study is the ratio of

operating cash flow to operating assets of the companies involved.
The cash flow measure used in this study is defined as profit
before tax, depreciation and interest, adjusted for changes in
working capital. This definition is similar to that adopted by
Bowen et al. (1986), Manson et al. (1994) and Ali and Pope
(1995) but differs from that used by Healy et al. (1992 and
1997), Anand and Singh (1997) and Ghosh (1998). The latter
authors make no adjustment for working capital accruals, which
have been shown to be subject to manipulation by manage-
ment.16 Dechow (1994) points out that:
many financial analysts regard operating cash flow as a better gauge of
corporate financial performance than net income, since it is less subject to
distortion from differing accounting practices (1994, p. 5).
Murphy and Zimmerman (1993) regard the difference

between accounting profits and cash flows, as that over which
managers can exercise the most discretion.
To compare performance across firms, measures of operating
cash flow are scaled by the book value of assets, calculated as
book value of shareholders funds and total debt less cash and
marketable securities at the beginning of the relevant year. We
use book values rather than market values for two reasons. First
we do not possess market values for our target companies as
these were private companies. Secondly one of the problems
that previous authors (in particular Healy et al., 1992) have
tried to avoid is to bias the denominator by prior expectations
of how the takeover is likely to perform. In their studies they
attempt to exclude any market reaction to the bid itself. If the
market had perfect foresight then the share price would capture
all of the expected gains. The use of market values in the
denominator would then hide any post-acquisition change in
performance. As we are attempting to capture the change in
operating performance we need to exclude any share price
change that reflects the expected performance change resulting
from the acquisition. Healy et al. (1992) achieved this by
eliminating price changes around the bid announcement date
on the assumption that the market is efficient in relation to the
news and that there is no long-term adjustment. On the basis of
recently published research (for example Agrawal, Jaffe and

Mandelker, 1998; and Gregory, 1997) we cannot be confident

that the price adjustment is swift. Hence even if it were possible
to provide proxy values for target companies we would still have
a problem in identifying the period over which value changes
should be excluded from the denominator.
(iii) Expected Performance Model

We construct a consolidated measure of combined bidder and
target pre-acquisition operating performance for each of the
four years (4 to 1) prior to takeover (wherever available).17
The performance of each is weighted by the book value of
operating assets of each at the beginning of the relevant
year.18 The post-acquisition operating performance is calcu-
lated using the actual values reported by the combined firm,
deflated by the book value of operating assets at the beginning
of the relevant year.19 We exclude from our denominator any
identified revaluation of fixed assets or goodwill arising from
the acquisition.20
The control benchmark operating performance measure is
then calculated for each pair of control companies in each of the
four years prior to the bid, where available, and for the five
years post-bid. In the pre-acquisition period, the combined
control company performance measure is weighted by the rela-
tive operating asset values of the bidder and target firms at the
beginning of the relevant year. The post-acquisition combined
benchmark is computed by weighting the individual company
performance by the relative asset value of the bidder and target
firms at the end of the year prior to the acquisition. The control-
adjusted operating performance is obtained by subtracting the
relevant benchmark measure of operating performance from
the combined measure for the bidder and target companies. We
report measures of median annual performance based on all
observations for the pre- and post-acquisition periods. In add-
ition summary statistics are constructed for each takeover
individually by calculating the median of the control-adjusted
measures ðAPcprei Þ over the four years prior to acquisition,
where available, and also for the median value over the five
years after acquisition. Tests are undertaken of the difference in
median control-adjusted performance from before to after the

bid. In addition the change in control-adjusted operating per-

formance is estimated using the following model:21
c c
APposti ¼ þ APprei þ "i
where:
APcposti is the median annual control-adjusted operating

performance for company i for the post-acquisition years
APcprei is the median annual control-adjusted pre-acquisition
operating performance median for the pro-forma combined
bidder and target company.
The intercept represents the change in control-adjusted
performance.
The slope coefficient captures any correlation in cash flow
returns between pre-and post acquisition years.
The advantage of using a regression analysis is that it avoids

making assumptions about the relative change in performance
from pre- to post-acquisition (Ghosh, 1998).22
4. RESULTS OF TESTS ON OPERATING PERFORMANCE
This section provides discussion and analysis of the results for

the various tests with both median and mean values reported in
the tables. However, analysis focuses on median returns as the
mean values obtained in this study are influenced significantly
by outliers. In comparing median performance across the
different sample groups, the Wilcoxon signed rank tests and
Mann-Whitney tests are used.
(i) Cash Flow and Asset Growth Rates

The rate of change in cash flow and operating assets in both
pre-and post-acquisition periods are reported in Table 3, rela-
tive to the values in the year prior to acquisition. Thus the mean
and median change for period (1, þ2) represents the change
from year 1 to the second year post-acquisition.
Panel A of Table 3 shows that the rate of growth in operating
cash flows of the combined bidder and target was not significantly

372
Table 3
Control-adjusted Growth in Operating Cash Flow and Operating Book Value of Assets for Combined Bidder and
Targets in Malaysian Acquisitions in the Period 1988 to 19921
Period Relative to Acquisition Year

(4, 1) (3, 1) (2, 1) (1, þ1) (1, þ2) (1, þ3) (1, þ4) (1, þ5)
% % % % % % % %
Panel A: Rate of Growth of Cash Flow

Median:
RAHMAN AND LIMMACK

Combined Firm 71b 98b 18 61a 83a 210a 316a 322a
Control 64b 6 1 4 24b 25b 30b 7
Control-adjusted 49 53 4 71b 1b 197a 288a 353a
Trimmean (20%)
Combined Firm 119c 128b 43b 101a 126a 330a 657a 642a
b
Control 126 42 24b 9 59a 54a 68a 20a
Control-adjusted 16 76 34 153a 44a 365a 629a 782a
% Positive
Combined Firm 64 63 56 61 64 76 80 77
#
Blackwell Publishing Ltd 2004
Control 74 54 49 50 55 56 60 52
Control-adjusted 45 57 51 60 50 65 68 73
Panel B: Rate of Growth of Operating Assets

Median:
Combined Firm 15a 18a 5a 95a 116a 188a 271a 330a
Control 7 11b 3b 9 22a 36a 54a 95a
#
PERFORMANCE OF MALAYSIAN COMPANIES

Trimmean (20%)
Combined Firm 42b 35a 13 126a 200a 327a 462a 671a
Control 29b 18b 8b 19a 39a 57a 97a 151a
% Positive
Combined Firm 74 73 65 90 93 95 97 96
Control 59 61 58 67 77 79 86 89
Control-adjusted 62 59 51 76 74 77 77 74
No. of observations 38 70 88 94 94 94 94 94
Notes:
1
Operating cash flow is defined as operating profit before tax and extraordinary items, adjusted for depreciation and goodwill and changes in
working capital (that is, changes in stocks, trade debtors and prepayments and changes in creditors and accruals). The operating book value of
assets at the beginning of the year is the book value of shareholders funds (share capital plus reserves) plus total debt, less cash and marketable
securities. Before the acquisition (year 1), cash flow and operating asset values of the combined firm and their controls are weighted averages of
the acquirer and target values, with the weight being the relative operating asset values of the two firms. The values of the combined firm are used
in the post-acquisition period. Post-acquisition control returns are target control and bidder control values, weighted by the relative operating
asset values of the two corresponding bidder and target firms at the beginning of the year prior to acquisition (year 1). Control-adjusted values
are computed for each firm and year as the difference between the firm value in that year and the value of the control firm in the same industry
during that period.
a
Significantly different from zero at the 1% level, using a two-tailed test.
b
c
373
different to that of the combined control companies in any of

the years prior to the takeover. By contrast, the rate of growth
was significantly greater than that of the controls in each of the
five years post-acquisition. The high values for the rate of
increase in cash flow in post-acquisition years is partly due to
a low cash flow for some observations in the year prior to
acquisition.23 However, the significantly higher rates of growth
are still observed when attention is focused on median values.
As shown in Panel B, the median and trimmed mean control-
adjusted rates of growth in operating assets are also significantly
positive in the post-acquisition period (although not in the
pre-acquisition period). The period of time covered in the
current study was one of a high rate of growth in the Malaysian
economy. The results suggest that firms involved in takeovers
were at the forefront of this growth. Of itself these preliminary
results are not inconsistent with the notion advanced by some
authors that takeovers are undertaken in the interests of
management (Mueller, 1980). In the next section we examine
whether Malaysian takeovers also create the opportunity for
shareholders to benefit.
(ii) Pre-acquisition Operating Performance

Table 4 provides summary statistics of the median and mean
operating performance of targets and bidders relative to their
controls, and of bidders relative to targets in each of the four
years prior to acquisition. As shown in Panel A of Table 4,
the median control-adjusted operating returns for targets are
positive in each of the four pre-acquisition years although they
are only significantly different from zero in years 2 and 1.
The use of cash flow measures of performance reduces the
likelihood that what we are capturing here is accounting policy-
based earnings management by the directors of the target
company to enhance a potential bid price although we cannot
rule out non-accounting-based earnings management. To the
extent that the latter behaviour has occurred our subsequent
analysis will be biased against finding any evidence of improve-
ment in post-acquisition operating performance. Allowing for
the possibility of unobservable earnings management the results
suggest that prior to the acquisition target companies perform

#
Blackwell Publishing Ltd 2004 Table 4
Summary Statistics
Panel A: Pre-acquisition Control-adjusted Operating Performance for 113 Targets and 94 Bidders1
Targets Control-adjusted Bidders Control-adjusted

Year Relative to Acquisition Median % Mean % % Positive Obs. Median % Mean % % Positive No. of Obs.
4 5.10 5.71 53.33 45 0.38 0.57 51.76 85

3 2.47 0.74 53.57 84 0.54b 2.51 48.39 93
2 3.60b 1.94 57.55 106 1.30 1.00 44.09 93
1 4.30b 11.64c 60.18 113 1.75c 1.23c 46.81 94
Average for years (4 to 1) 3.60a 5.29 56.90 0.88a 0.45c 47.67
Panel B: Pre-acquisition Operating Performance of Bidders Relative to Targets1

Bidders Targets Bidders vs Targets
Year Relative to Acquisition Median % Mean % Median % Mean % Median % Mean % % Positive No. of Obs.
4 6.85 5.90 4.39 5.14 1.72 0.76 53.33 45

3 4.01 3.27 4.40 0.79 1.66 4.05 53.57 84
2 5.59 2.84 5.31 2.22 0.76 5.07 48.11 106
1 5.85 6.79 5.79 11.48 1.02 4.69 45.13 113
Average for years (4 to 1) 5.61 4.62 4.70 3.53 0.21 1.10 49.14
Notes:
1
Operating performance is defined as operating cash flow deflated by the book value of operating assets. Operating cash flow is defined as
operating profit before tax and extraordinary items, adjusted for depreciation and goodwill and changes in working capital. Operating assets at
the beginning of the year is the book value of equity plus total debt less cash and marketable securities. Control-adjusted values are computed for
375
each firm and year as the difference between the firm value in that year and the corresponding value for the industry-matched control firm.
a
b
c
better than non-acquired companies. Not surprisingly, given

the nature of our sample of private targets, this result is
contrary to that expected based on traditional theories of the
disciplinary role of takeovers and also contrasts with that found
in early accounting studies of target company performance.24
Holl and Pickering (1988) and Kennedy and Limmack (1996)
for the UK; and Palepu (1986), Lang, Stultz and Walkling
(1991) and Mikkelson and Partch (1997) for the USA, found
evidence supporting the hypothesis that targets are generally
taken from the population of firms with poor pre-bid per-
formance. The sample of acquisitions in the current study,
representing takeovers of private Malaysian companies, does
not however, appear to be disciplinary in nature.
Panel A of Table 4 also summarises operating cash flow
returns of bidders relative to their control companies from
years (4 to 1). Again traditional economic theory suggests
that takeover bids are likely to be initiated by companies from
the more efficient sectors of an economy.25 However, as shown
in Table 4, bidders underperform relative to the control
companies during the period prior to acquisition. The median
performance for the acquiring companies is lower than that of
their controls for all pre-acquisition years except year-4.
The median annual control-adjusted performance is also
significantly negative (0.88%) over the 4-year period prior to
acquisition.
Panel B of Table 4 summarises the results of comparison of
operating performance of acquiring with target firms. Lang,
Stultz and Walkling (1989) and Servaes (1991) provide evidence
that well-managed bidders with high q ratio created more value
by taking over poorly performing companies with low q ratio.
Holl and Kyriazis (1997) also provide evidence that target com-
panies in the UK with low Tobin’s q are taken over by acquiring
firms with high Tobin’s q.26 As reported in Panel B of Table 4,
the median operating performance of bidders is higher than
that of targets in years 4 and 3 prior to acquisition, but lower in
the two years immediately prior to acquisition. In none of the
years is the difference significantly different from zero. The
result is inconsistent with Manne’s (1965) concept of a market
for corporate control in which the more capable and competent
executive teams tend to replace those that are less capable and

competent. Again, however, we emphasise that this disciplinary

role is unlikely to be present in agreed bids, representing the
normal characteristic of the private acquisitions included in the
current sample.
(iii) Operating Performance of Combined Firms

As reported in Table 5, the median operating performance for
the combined firms in the four years prior to acquisition ranges
from 3.98% to 7.16%. In the five years subsequent to the
acquisition, median operating performance of the combined
firms has improved, with values ranging from 5.42% to
9.93%. The median annual post-acquisition performance for
years (þ1 to þ5) for the combined firm is 7.37%, and is
significantly higher than the median annual pre-acquisition
performance. No significant change in operating performance
of the control companies was however, reported from
pre-(6.44%) to post-acquisition (4.95%).
The control-adjusted median and mean performance meas-
ures are also reported in Table 5. In the pre-acquisition period,
median control-adjusted operating performance ranged from
1.26% to 5.15%, although in no year was this significantly
different from zero. The median (and mean) control-adjusted
operating performance is positive in each of the five post-
acquisition years, ranging from 0.27% to 5.65% (2.75% to
11.23%). The control-adjusted median performance is signifi-
cantly positive in years þ3, þ4 and þ5 while the mean return is
significantly positive in four out of five post-acquisition years. In
addition the (average) median control-adjusted annual per-
formance of the combined bidder and target firms increased
significantly from 0.12% in the period prior to acquisition to
2.95% in the post-acquisition period. In summary the results
demonstrate that the operating performance of Malaysian
companies improves following acquisition. It should be
emphasised that this improvement is not simply as a result of
some form of ‘profit-averaging’, through the acquisition of
relatively profitable targets, as our basis of comparison is with
a weighted average of target and bidder control-adjusted
pre-acquisition performance.

378
Table 5
Operating Performance for 94 Combined Acquiring and Target Firms for Malaysian Acquisitions Completed
in the Period 1988–19921
Panel A
Combined Firm Control Control-adjusted
RAHMAN AND LIMMACK

4 7.16 7.38 4.41 5.22 3.15 2.15 57.89 38
3 3.98 3.54 7.52 5.05 0.05 1.51 50.00 70
2 5.41 5.77 6.57 3.17 1.26 2.60 46.59 88
1 6.66 9.82 5.15 5.42 0.26 4.40 51.06 94
þ1 6.59 9.23 5.30 3.70 0.27 5.54c 54.26 94
þ2 5.42 8.69 5.78 5.94 0.33 2.75 52.13 94
þ3 8.03 10.10 5.61 2.99 5.65b 7.11a 62.77 94
#
þ4 9.93 15.27 4.28 4.04 4.03a 11.23a 71.28 94

þ5 8.85 11.77 4.09 3.98 3.98a 7.79b 63.83 94

Average for years (þ1 to þ5) 7.37a 11.01b 4.95 4.13 2.95a 6.88b 60.85
#

Panel B: Change in Control-adjusted Operating Performance
APcposti ¼ 0:0375 þ 0:204 APcprei
(3.3)a (2.95)a
a
(3.5) (2.60)b
R2 ¼ 0.09 F-statistic ¼ 8.72a
APcposti and APcprei are the median annual adjusted operating performance in the pre- and post- acquisition period for firm i.
T stats in second brackets are those adjusted for heteroscedasticity (White’s correction)
Notes:
1
Operating performance in the pre-acquisition period is calculated as pre-tax operating cash flow return on operating assets of target and bidder,
weighted by the relative asset sizes of the two firms. Post-acquisition performance uses data for the combined firms. Pre-acquisition combined
control returns are calculated using the individual target and bidder control returns, weighted by the relative operating asset values of the
corresponding bidder and target firms at the beginning of the years. In the post-acquisition period the weights used to compute control company
returns are the relative operating asset values of the acquirer and target firms in year 1. Control-adjusted values are computed for each firm
and year as the difference between the firm value in that year and the value of the corresponding industry-matched control firm.
a
Significantly different from zero at the 1% probability level, using a two-tailed test.
b
c
379
As explained earlier, we also calculate the median of the four

years pre-acquisition performance for each combined firm with
a similar measure calculated over the five post-acquisition years.
Post-acquisition median operating performance is then
regressed on the pre-acquisition operating performance.27
Panel B of Table 5 shows the results of the regression on
abnormal control-adjusted cash flow returns. The slope
coefficient is significantly different from zero but the value, of
0.204, indicates a lack of persistence in control-adjusted cash
flow returns over time. The intercept, , is 0.0375, indicating
that the combined firms obtain a significant increase of 3.75%
per year in post-acquisition period after controlling for the
pre-acquisition performance.28
The decision to allow the slope coefficient to be uncon-
strained (as above) is open to potential criticism. For example,
Manson et al. (1994) and Gadad and Thomas (2000) argued
that a slope coefficient close to zero reflects a highly competitive
industry in which the pre-acquisition control-adjusted perform-
c
ance ðAPpre Þ would therefore be expected to steadily revert to
zero as any comparative advantage is eventually eliminated. By
contrast a slope coefficient of one would reflect an uncompeti-
tive economy in which comparative advantage is retained, while
an intermediate slope coefficient reflects an imperfectly
competitive industry. We therefore repeat the analysis but
constrain the slope coefficient to be either zero or unity (assumed
extreme values). When the slope coefficient is constrained to be
equal to one, the improvement in performance is 2.75%
(insignificantly different from zero). However, when the slope
coefficient is constrained to be equal to zero, then the
improvement in performance is a statistically significant 4%.
The above results are consistent with those reported by Healy
et al. (1992) and Ghosh (1998) for US acquisitions, and by
Manson et al. (1994) for UK acquisitions. Healy et al. (1992)
found a significant improvement in pre-tax operating perform-
ance relative to the industry average over the post-acquisition
period.29 Ghosh (1998) also found that acquiring firms show
significant improvement in their post-acquisition operating
performance relative to their industries average.30 Similarly,
Manson et al. (1994) reported a significant improvement in

operating performance after acquisition for takeovers in the UK

during the period 1985 to 1987.
In order to test the robustness of the above results to alter-
native definitions of operating performance, we repeat our
analysis using the definition adopted by Healy et al. (1992)
i.e. excluding any adjustments for working capital accruals. We
again find a significant increase in the average annual control-
adjusted post-acquisition performance although application
of this alternative definition results in a smaller proportion
of observations reporting positive post-acquisition control-
adjusted performance (58% versus 62%).31 Overall, however,
the conclusions are unaffected by the use of the alternative
definition.
In summary the results above indicate that our sample of
Malaysian takeovers do lead to an improvement in operating
performance even when the companies involved are not driven
by disciplinary motives, as is likely to be the case in our
sample.32
(iv) Sources of Operating Performance Changes

In the current section we attempt to identify the source of the
improvement in operating performance. The operating cash
flow return on assets can be decomposed into operating margin
and sales turnover. The operating margin measures pre-tax
operating cash flow per dollar of sales while the sales turnover
ratio measures the dollar sales generated for each dollar
invested in assets.
Table 6 provides summary data on operating margin for the
94 combined target and bidder firms in the years surrounding
the acquisition. The median annual operating margin increased
(not statistically significant) from 0.125 in the pre-acquisition
period to 0.142 in the post-acquisition period. The combined
control companies, on the other hand, experienced a decrease
in operating margin from 0.138 to 0.100 over the same time
period. The control-adjusted median operating margin
increased from 0.032 in years (4 to 1), to 0.077 in the
post-acquisition period. The Wilcoxon signed rank test indicates
that the increase in median annual control-adjusted post-
acquisition operating margin is significant at the 5% level.

382
Table 6
Operating Margin for 94 Combined Acquiring and Target Firms for Malaysian Acquisitions Completed in the
Period 1988–19921
Panel A
RAHMAN AND LIMMACK

Year Relative to Acquisition Median% Mean% Median% Mean% Median% Mean% % Positive No. of Obs.
4 0.198 0.346 0.101 0.024 0.098b 0.321b 63.16 38

3 0.111 0.135 0.140 0.377 0.175b 0.512b 41.43 70
2 0.116 0.049 0.168 0.046 0.074 0.003 40.91 88
1 0.112 0.172 0.165 0.165 0.009 0.007 51.06 94
þ1 0.099 0.039 0.114 0.024 0.044 0.099 52.13 94
þ2 0.100 0.076 0.118 0.018 0.031 0.197 54.26 94
þ3 0.152 0.179 0.103 0.045 0.086c 0.242 65.96 94
#
0.126a
þ4 0.165 0.287 0.074 0.133 0.100 61.70 94

þ5 0.177 0.233 0.075 0.044 0.091a 0.207 67.02 94
Average for years (þ1 to þ5) 0.142 0.163c 0.100a 0.019 0.077b 0.169b 60.21
#

Panel B: Abnormal Adjusted Post-acquisition Operating Margin (t-values in parentheses)
AScposti ¼ 0:10 þ 0:12 AScprei R2 ¼ 0.09 F-statistic ¼ 9.4a
(2.04)b (1.18)
(2.53)b (1.02)
AScposti and AScprei are the median annual control-adjusted operating margin in the post- and pre-acquisition period for firm i.
T stats in second brackets are those adjusted for heteroscedasticity (White’s correction)
Notes:
1
Operating margin is defined as operating cash flow as a percentage of sales. Performance measures for the combined firm in the pre-acquisition
period are weighted by the relative asset sizes of the two firms. Post-acquisition-performance used data from the combined firms. Pre-acquisition
control company operating margins are calculated from individual target and bidder control returns, weighted by the relative operating asset
values of the two corresponding bidder and target firms at the beginning of the relevant year. In the post-acquisition period the weights used to
compute combined control company returns are the relative operating asset values of the acquirer and target firms in year 1. Control-adjusted
values are computed for each firm and year as the difference between the firm measure in that year and the measure for the control firm during
that period.
a
b
c
383
We also report the results of regression of the median

operating margin for each combination over the 5-year post-
acquisition period on the median of the 4-year pre-acquisition
control-adjusted operating margin in Panel B of Table 6. The
intercept in the cross-sectional regression is a significantly
positive 0.10, confirming that the operating margin has
improved post-acquisition. Healy et al. (1992) also found that
combined firms earned a higher operating margin than their
industry counterparts in the post-acquisition period. However,
the latter authors were reluctant to attribute the increase to the
acquisition itself as the median operating margin was also higher
than that of the control companies in the pre-acquisition period.
Summary statistics on sales turnover, defined as the ratio of
sales to operating assets, are reported in Table 7. The median
annual pre- and post-acquisition rates of turnover for the
combined firms are 0.41 and 0.52, respectively. Examination
of results for individual years pre-acquisition suggest that the
improvement had begun in year 1 although we are unable
to speculate as to whether this improvement would have con-
tinued in the absence of the takeover. The median annual sales
turnover rate is relatively unchanged for the control companies,
increasing slightly from 0.47 before the acquisition to 0.51
post-acquisition. Overall the median annual control-adjusted
sales turnover for the combined firms is 0.05 over years (4 to
1) but increased significantly to 0.01 over the period (þ1 to þ5).
The results of regression of median control-adjusted
post-acquisition sales turnover rates for each company on the
pre-bid measure are summarised in Panel B of Table 7. The
value of the intercept term at 0.08 is significantly different from
zero, and confirms the finding of a significant improvement in
the combined firms’ sales turnover in the post-acquisition
period. The results are again similar to those reported by
Healy et al. (1992) who found that the median sales turnover of
the combined firms was lower than that of the industry control prior
to acquisition but comparable to the industry control in the
post-acquisition period.
One puzzling feature of the above analysis is that the improve-
ment in operating performance and in operating margins is most
apparent in post-acquisition years three to five whereas the
greatest improvement in sales turnover came in the first two

#

Table 7
Sales Turnover for 94 Combined Acquiring and Target Firms for Malaysian Acquisitions Completed in the
Period 1988–19921
Panel A
Year Relative to Acquisition Median% Mean% Median% Mean% Median% Mean% % Positive No. of Obs.
4 0.311 0.574 0.503 0.738 0.104 0.164 34.21 38

3 0.380 0.578 0.485 0.967 0.067c 0.389 35.71 70
2 0.400 0.609 0.456 0.811 0.069 0.202c 38.64 88
1 0.509 0.800 0.437 0.774 0.002 0.027 52.13 94
þ1 0.576 0.737 0.536 0.684 0.056 0.053 55.32 94
þ2 0.528 0.713 0.442 0.626 0.042 0.087 56.38 94
þ3 0.529 0.691 0.533 0.750 0.041 0.059 48.94 94
þ4 0.515 0.635 0.523 0.666 0.016 0.031 54.26 94
þ5 0.494 0.614 0.515 0.675 0.026 0.061 48.94 94
Average for years (þ1 to þ5) 0.521 0.663 0.508 0.679c 0.010b 0.016c 52.77
385
386
Table 7 (Continued)
Panel B: Change in Control-adjusted Sales Turnover Post-acquisition (t-values in parentheses)

AATcposti ¼ 0:08 þ 0:310 AATcprei R2 ¼ 0.215 F-statistic ¼ 25.16a
c a
RAHMAN AND LIMMACK

(1.62) (5.00)
(1.70)c (3.20)a N ¼ 94
c c
AATposti and AATprei are the median annual control-adjusted asset turnover in the post-and prior acquisition period for firm i.
Notes:
1
Sales turnover ratio is the ratio of sales to book value of operating assets at the beginning of the year. Turnover measures for the combined firm
in the pre-acquisition period are weighted by the relative asset sizes of bidder and target. Post-acquisition performance used data for the
combined firms. Pre-acquisition control company returns are based on target and bidder control ratios, weighted by the relative operating asset
values of the bidder and target firms at the beginning of the relevant year. In the post-acquisition period the weights used to compute control
company measures are the relative operating asset values of the acquirer and target firms in year 1. Control-adjusted turnover ratios are
computed for each firm and year as the difference between the firm measure for that year and the corresponding turnover ratio for the control
#
firm.
a
b
c
Significantly different from zero at the 10% probability level.
T-stats in second brackets are those adjusted for heteroscedasticity (White’s correction).
years following the acquisition. We can only speculate about

possible reasons for this, including attempts to increase market
share before raising margins or the impact of unobserved
reorganisation costs in the early years following acquisition.
However, the above results do suggest that the improvement
in post-acquisition operating performance is attributable partly
to an increase in sales turnover but more especially to higher
operating margins. Overall, it appears that our sample of
acquiring companies appear to make more efficient use of
resources available in the post-takeover period.
One possible reason for the improvement in the post-
acquisition sales turnover, described above, may be a reduced
asset base in the combined firm following disposal of assets
post-acquisition. Indeed one of the motives for the acquisition
may well be to eliminate unwanted capacity. Although an
alternative motive for asset disposals is to report a short-term
improvement in profitability, it is unlikely that this form of
‘performance manipulation’ has occurred in the sample under
investigation, given the large increases in operating assets
reported in Table 3 Panel B). Nevertheless we test whether a
reduction in the asset base is the source of the perceived
improvement in operating performance, by examination of
changes in the capital expenditure and fixed asset sales rates.
The capital expenditure rate is calculated by dividing the
capital expenditure for each year by the book value of assets
(equity plus debt) at the beginning of the year. The summary
statistics for the capital expenditure rates for 94 combinations of
bidder and target firms in the years surrounding the acquisition
are reported in Table 8. The median annual capital expendi-
ture rate for the combined firms has increased significantly
from 1.84% in the pre-acquisition period to 4.55% in the
post-acquisition period. There is a concurrent increase in the
median annual capital expenditure rate for the control com-
panies from 1.91% to 2.57% from the pre- to the post-acquisition
period, although the latter increase is not statistically significant.
The capital expenditure rate for the combined firms is signifi-
cantly higher (1.10%) than that of the control companies in the
post-acquisition period but not in the pre-acquisition period
(0.12%), although there is a significantly higher level in year
1.33 The combined firms also have a higher rate of capital

Table 8
388
Capital Expenditure Rates for 94 Combined Acquiring and Target Firms for Malaysian Acquisitions Completed
in the Period 1988–19921
b b
4 1.04 1.58 2.15 5.21 1.17 3.63 34.21 38
3 1.48 4.24 1.18 5.62 0.09 1.38 54.29 70
2 1.97 6.29 2.63 5.83 0.09 0.46 53.41 88
RAHMAN AND LIMMACK

1 4.32 9.44 2.03 5.73 1.92b 3.71 63.83 94
þ1 4.77 10.67 2.25 5.50 2.12b 5.17b 67.02 94
þ2 3.89 7.32 2.71 5.33 1.02b 1.99c 58.51 94
þ3 4.79 9.09 3.19 5.45 0.41b 3.63b 55.32 94
þ4 4.98 8.88 2.33 4.81 1.38b 4.08b 62.77 94
þ5 4.78 8.25 2.85 5.47 0.53c 2.78b 54.26 94
Average for years (þ1 to þ5) 4.55a 8.84a 2.57 5.31 1.10b 3.53a 74.47
#
Notes:
1
Capital expenditure rate is measured by dividing the capital expenditure for the year by the book value of assets (equity plus reserves plus total
debt) at the beginning of the year. Expenditure rates for the combined firm in the pre-acquisition period are weighted by the relative operating
values of the two firms. Post-acquisition measures use data for the combined firms. Pre-acquisition control company expenditure rates are based
on target and bidder control measures, weighted by the relative operating asset values of bidder and target firms at the beginning of the relevant
year. In the post-acquisition period the weights used to compute control company expenditure rates are the relative operating asset values of the
acquirer and target firms in year 1. Control-adjusted rates are computed for each firm and year as the difference between the rate for the
combined firm and that of the control firm during the same period.
a
b
c
expenditures than that of the control companies in 74% of cases

in the post-acquisition period as compared to 54% of cases pre-
bid.34 There is therefore no evidence that the improvement in
operating performance, reported earlier, is a consequence of
lower asset acquisition rates following the takeover. In short the
combined firms do not appear to have sacrificed long-term
investments for the sake of short-term profitability. In contrast
with the above, Healy et al. (1992) reported that while the
median capital expenditure rate of their sample of combined
firms was 14.4% and 10.6% in the pre-and post-acquisition
periods respctively, these rates were not significantly different
from their industry average in the relevant periods. They con-
cluded merely that the improvements in the post-operating
cash flow was not caused by reduced investment for the long
term.
As a final test of the investment (and disinvestment) activities
of the post-acquisition combined firms, asset sales rates are also
analysed. The asset sales rate is defined as cash receipts from
asset sales during a year divided by the book value of total
assets. The summary data on asset sales rates are reported in
Table 9. The median annual sales rate for the combined firm
has increased from 0.11% in the period (4 to 1) to 0.18% in
the period (þ1 to þ5). During the same period, the median
annual sales rate for the control companies has also increased
from 0.10% pre-bid to 0.14% post-acquisition. Overall, how-
ever, the control-adjusted annual sales rate has not significantly
changed from the pre-bid to post-acquisition period.
The above analysis of asset sales rates further confirms that
the increase in operating performance post-acquisition is not
due to a reduction in the asset base. Rather the improvement in
operating performance appears to have been achieved by a
more efficient utilisation of assets in a growing firm.
(v) Replacement of Target Management

In the final section of our analysis we investigate whether
changes in senior management of the target company following
the acquisition has any impact on post-acquisition performance.
In support of Manne’s (1965) concept of a market for corporate

Table 9
Asset Sales Rates for 94 Combined Acquiring and Target Firms for Malaysian Acquisitions Completed in the Period
390
1988–19921
4 0.06 0.47 0.13 0.71 0.02 0.22 47.37 38

3 0.10 0.40 0.08 0.35 0.01 0.06 54.29 70
2 0.11 1.10 0.10 1.12 0.01 0.01 55.68 88
1 0.14 1.56 0.10 0.89 0.01 0.66 54.26 94
RAHMAN AND LIMMACK

þ1 0.16 1.64 0.16 0.56 0.03 1.08b 58.51 94
þ2 0.20 1.15 0.13 0.76 0.02c 0.39 53.19 94
þ3 0.15 0.43 0.16 1.91 0.01 1.48c 53.19 94
þ4 0.20 0.80 0.10 0.48 0.05a 0.33 58.51 94
þ5 0.20 0.98 0.16 0.59 0.04 0.38 58.51 94
Average for years (þ1 to þ5) 0.18a 1.00 0.14c 0.86 0.03 0.14 70.48
Notes:
1
Asset sale rate is defined as cash receipts from asset sales divided by the book value of assets (equity plus reserves plus debt). Asset sales rates for
#
the combined firm in the pre-acquisition period are weighted by the relative asset sizes of the two firms. Post-acquisition measures use data of the
combined firms. Pre-acquisition control company rates are based on individual target and bidder control rates, weighted by the relative operating
asset values of the corresponding bidder and target firms at the beginning of the year. In the post-acquisition period the weights used to compute
control company sales rates are the relative operating asset values of the acquirer and target firms in year 1. Control-adjusted sales rates are
computed for each firm and year as the difference between the firm measure for that year and the measure for the control firm in the
corresponding year.
a
b
c
control, Denis and Denis (1995) document that forced resigna-

tions of top managers are followed by improvements in operat-
ing performance. A number of studies, including those by
Walsh and Ellwood (1991), Martin and McConell (1991),
Mikkelson and Partch (1997) and Kennedy and Limmack
(1996) have reported significant increases in turnover of top
management in target companies following takeover. As the
majority of target companies included in the sample are private
companies, the disciplinary motives identified in the above
studies are unlikely to be present. Rather we anticipate that in
the current sample the retention of existing directors is likely to
be observed as a positive feature in the transition of ownership
and control.
We identify changes in executive directors and chairman of
target companies in the year following acquisition. Lack of
availability of data restricted our analysis to 80 instances,
for which no changes occurred in 32 cases and all or some of
the executive directors were replaced in 48 cases.35 Tests were
then conducted to determine whether replacement of target
directors had any impact on post-acquisition performance,
with the results summarised in Table 10.
As reported in Table 10 the median increase in control-
adjusted performance is a statistically insignificant 2% (9%
mean) for the sub-sample of acquisitions in which the target
directors were replaced. However, for the sub-sample in which
all target directors were retained the median increase in
performance is statistically significant at 4% (5% mean). The
increase in performance is significantly higher (at the 10% level)
for the latter group based on a Mann-Whitney test of difference
in performance.
As the above results indicate we do not observe the positive
relationship between replacement of senior management
and performance improvements, that might be expected in
disciplinary bids. Rather it appears that, if anything, retention
of existing management is more likely to lead to performance
improvement. This result is consistent with our earlier
conclusion that our sample is unlikely to consist of disciplinary
takeovers.

392
Table 10
Impact of Directors Turnover on Operating Performance in Malaysian Acquisitions Completed in the Period
1988–19921 (t-values and z-scores in parentheses)
Takeovers Involving Replacement of Directors Takeovers Involving Retention of Directors
Control-adjusted Performance Control-adjusted Performance

Pre-acquisition Post-acquisition Change Pre-acquisition Post-acquisition Change
RAHMAN AND LIMMACK

b
Median 0.01 0.04 0.02 0.01 0.03 0.04b
(1.01) (1.46) (1.25) (0.71) (2.71) (2.05)
Mean 0.04 0.06b 0.09 0.01 0.04a 0.05
(0.69) (2.69) (0.601) (1.16) (3.60) (1.35)
Maximum 0.72 0.33 0.48 0.72 0.33 0.48
Minimum 0.17 0.26 0.21 0.33 0.26 0.11
Standard Deviation 0.17 0.12 0.17 0.17 0.12 0.17
Sample size 48 48 48 32 32 32
#
Notes:
1
Operating performance is defined as operating profit before tax and extraordinary items, adjusted for depreciation and goodwill and changes
in working capital deflated by the book value of operating assets (shares plus debt less cash and marketable securities) at the beginning of the
year. Control-adjusted operating cash flow return is the difference between the firm operating performance in that year and the value of the
control firm during that period. Control-adjusted change operating performance is measured as the change of post-control-adjusted operating
performance from the pre-acquisition period.
a
Significantly different from zero at the 1% level.
b
Significantly different from zero at the 5% level.
5. CONCLUSION
This paper has tested for evidence of operating improvements

in Malaysian acquisitions by examining operating performance
for a sample of 94 quoted acquiring and 113 target Malaysian
companies involved in acquisitions over the period January 1,
1988 to December 31, 1992. The majority of target companies
that are included in the sample are private companies and are
therefore much more likely to be entering into voluntary com-
binations with their acquirer than is often the case in other
studies. We would, therefore, not necessarily expect to observe
the same characteristics in the current sample as those that are
hypothesised for companies involved in disciplinary takeovers.
Our initial analysis confirms this view as, prior to the acquisi-
tion, target companies have higher operating performance than
their control companies, but acquiring firms have lower
operating performance than either their controls or the target
companies. The results of subsequent analysis suggest that
operating cash flow performance for combined firms in
Malaysian acquisitions improve significantly following acquisi-
tions.
Analysis of the components of operating cash flow indicates
that improvements in post-acquisition performance are driven
both by an increase in asset productivity and also by the higher
levels of operating cash flow generated per unit of sales.
Increases in capital expenditure rates in the post-acquisition
period suggest that the combined firms have not sacrificed
their long-term investments for the sake of short-term
profitability. The results obtained demonstrate that there are
opportunities for operating gains to be made from takeovers,
even when these are not explicitly disciplinary bids. This finding
is reinforced when turnover of senior management of target
companies is considered. Possible sources of the operating
improvements include increased economies of scale, the benefits
of access to an internal financial market (Hubbard and Palia,
1999), and the substitution of objectives of shareholder wealth
maximisation for other sub-optimal objective functions held by
owner-directors (although the evidence relating to pre-bid target
firm performance, reported in Table 4, appears to refute the
latter).36

The findings in the current paper raise several interesting

issues for future research. The conclusion that acquisitions
improve post-acquisition operating performance, based on ana-
lysis of operating cash flows, appears to be contrary to the
results reported in those studies in the UK and the US that
have employed accounting data to examine improvements in
operating performance. A pattern of negative post-acquisition
performance reported in accounting-based studies may be a
consequence of the acquisition accounting methods adopted or
potential earnings manipulation, neither of which affects the
measurement rules used in the current study.37 The results
do, however, suggest that at least in Malaysian acquisitions,
there is the potential for improvements in operating perform-
ance. The results also suggest that opportunities for economic
gains from takeover activity may also differ according to the
form and ownership characteristics of targets. Studies that fail to
control for the various characteristics of companies involved
may therefore be unable to isolate the economic impact.
NOTES
1 The National Development Policy (NDP), which replaced the National
Economic Policy (NEP) in 1991, sought to raise bumiputra ownership of
national wealth to 30%.
2 In addition one particular potential source of benefit to the economy is the
provision of an exit strategy for owner/managers of smaller companies and
the encouragement of an entrepreneurial environment.
3 The inclusion of four public-listed targets in an earlier version of this
paper did not significantly affect the results or the conclusions
4 Lanen and Thompson (1988) describe an environment in which cash flow
data may provide a more appropriate test of the relationship between
economic events and firm performance than share price reaction.
5 Studies that have reported positive returns to targets and bidders
around announcement period in the USA include Dennis and McCon-
nell (1986), Magenheim and Mueller (1988) and Jarrell and Poulsen
(1989). Studies that have reported that acquisitions in the UK are, on
average, value enhancing for the shareholders around the bid period
include those by Franks and Harris (1989) and Sudarsanam et al.
(1996).
6 Other studies of post-acquisition returns in the US include Mandelker
(1974) and Langetieg (1978).
7 Cash tender offers are also more likely to be associated with potentially
disciplinary bids.

8 Agrawal et al. (1992) suggest that the sample used by Franks et al. (1991)
included a large sample of tender offers for which cash was the method of
payment.
9 Franks and Harris (1989) showed significant negative post-acquisition
returns when the market model is used, but a significant positive post-
acquisition returns when the capital asset pricing model (CAPM) is used as
a benchmark.
10 It was not possible to include an earlier period as accounting information
was only retained by the KLSE post-1986 (up to five years of pre-
acquisition data was required for our analysis). The limited time frame
used in our study requires some caution before generalising from the
results.
11 A bidder acquiring either one or more target firms in the same year is
considered as one acquisition.
12 Asquith, Bruner and Mullins (1983) suggested that if the investment in the
target is small relative to the total value of the acquiring firm, the change in
value from the acquisition may not cause much change either in the
acquirer’s share price or other performance measures.
13 Healy et al. (1992 and 1997), Manson et al. (1994) and Anand and Singh
(1997) use five years post-acquisition period while Ghosh (1999) report his
data using 3 years post-acquisition period. Jarrell (1995) found that com-
bined firms experience improvement in performance over the longer term
(represented by the average of 4–6 post-acquisition years) while the com-
bined firms did not improve their performance over the short term (1 year).
He inferred that the combined firms have to absorb the initial costs of the
acquisition in the first year, then realising improvements in the long-term as
the firm’s assets or operations have been efficiently reorganised.
14 Multiple acquisitions were made by 19 bidders.
15 Industry-average values were not in any case available had we wished to
use these.
16 We do, however, re-run our analysis using their definition and report
summarised results.
17 As indicated by the number of observations reported in Table 3, data was
not available for all four years prior to the acquisition for all companies in
our sample. In addition financial data for the year in which the acquisition
occurred, year 0, is omitted to avoid distortions caused by one-off costs
incurred during the acquisition.
18 As mentioned earlier, the operating assets of target and bidder companies
is measured using the book value of equity plus reserves plus long-term
and short-term debt, less cash and marketable securities.
19 We use opening book values as the closing values are in part a function of
the operating performance used in the numerator (see also Healy et al.,
1992; and Ghosh, 1998).
20 Our use of cash flow measures in the numerator automatically excludes
the distorting effects of any amortisation or depreciation charges.
21 See also Healy et al. (1992), Manson et al. (1994) and Ghosh (1998).
22 We also test the sensitivity of the results to alternative specifications of beta
as either zero or 1.
23 Where negative cash flows occurred in any base year the absolute value
was used as denominator while the actual change was incorporated in the
numerator.

24 Manne (1965), Alchian (1950), Singh (1971), Fama and Jensen (1983) and
Jensen (1988).
25 A number of authors have referred to the limited nature of this assumption.
Refer to Limmack (2000), for a review of the disciplinary role of takeovers.
26 Lang, Stultz and Walkling (1989), Servaes (1991) and Holl and Kyriazis
(1997) use Tobin’s q ratio as a measure of managerial and financial per-
formance of the target and acquiring firms.
27 The method used in the current study is similar to that used in the studies
by Healy et al. (1992), Cornett and Tehranian (1992), Manson et al. (1994)
and Ghosh (1998).
28 When mean rather than median value is used in the regression analysis,
the intercept alpha continues to demonstrate a significant increase (of
7.0%) in performance.
29 Healy et al. (1992) reported that 73% of the sample in their study have
higher operating cash flow returns on assets than their industries in the
post-acquisition period. The combined firms obtained 2.8% median
annual industry-adjusted cash flow return for years 1 to 5 after acquisition
as compared to 0.3% median annual performance during the 5-year
period prior to acquisition.
30 However, Ghosh (1998) found that acquiring firms did not improve their
post-acquisition operating performance relative to that of matched firms,
where firms are matched on acquiring and target firm’s size and industry.
31 Further information on these results may be obtained from the authors on
request.
32 There is also likely to be some measurement error in attempts to eliminate
revaluations of operating assets following the acquisition and to that extent
our results will understate the impact of improved performance.
33 One explanation for the higher level in year 1, suggested by the referee,
is that a number of takeovers may have been generated by the realisation
by the target company management that they possessed insufficient
resources to continue with the planned expansion. This explanation
would be consistent with the internal capital markets hypotheses
expounded by Hubbard and Palia (1999), amongst others.
34 Note that these figures represent median performance, not the simple
average of individual years.
35 There were only six cases in which partial replacement of directors
occurred.
36 Although agency theory suggests that owner-managers may pursue
policies that are more likely to be wealth maximising, there are also
opportunities for large block-holders to pursue private benefits.
37 Additional analysis, not reported here, show that the conclusions are
unaffected by the use of accounting measures.
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Journal of Business Finance & Accounting, 31(3) & (4), April/May 2004, 0306-686X

Corporate Acquisitions and the

R. ABDUL RAHMAN AND R.J. LIMMACK*

One of the issues facing policy-makers in developing economies

new in Malaysia, it is a significant aspect in the growth of busi-

# Blackwell Publishing Ltd 2004

# Blackwell Publishing Ltd 2004

are not achieved at the expense of the long-term viability of

There are two research approaches normally employed in

# Blackwell Publishing Ltd 2004

based studies, whether based on UK or US data, tend to

# Blackwell Publishing Ltd 2004

acquisitions examined.8 Agrawal et al. (1992) also reported that

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are the negative returns found in these studies caused by

3. DATA AND METHODOLOGY

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(i) The acquiring firm must be quoted in the KLSE and

1988 1989 1990 1991 1992 Total

Initial bids identified 28 49 60 44 32 213

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Mean 47,492 279,854 0.215

obtained either from the companies themselves or from the

# Blackwell Publishing Ltd 2004

newly combined company while that for the control is based on a

(ii) Performance Measurement

The use of an operating cash flow measure also allows the

# Blackwell Publishing Ltd 2004

ure of performance used in the current study is the ratio of

Murphy and Zimmerman (1993) regard the difference

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Mandelker, 1998; and Gregory, 1997) we cannot be confident

(iii) Expected Performance Model

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bid. In addition the change in control-adjusted operating per-

APcposti is the median annual control-adjusted operating

The advantage of using a regression analysis is that it avoids

4. RESULTS OF TESTS ON OPERATING PERFORMANCE

This section provides discussion and analysis of the results for

(i) Cash Flow and Asset Growth Rates

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Period Relative to Acquisition Year

Panel A: Rate of Growth of Cash Flow

RAHMAN AND LIMMACK

Panel B: Rate of Growth of Operating Assets

PERFORMANCE OF MALAYSIAN COMPANIES

different to that of the combined control companies in any of

(ii) Pre-acquisition Operating Performance

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PERFORMANCE OF MALAYSIAN COMPANIES

4 5.10 5.71 53.33 45 0.38 0.57 51.76 85

Panel B: Pre-acquisition Operating Performance of Bidders Relative to Targets1

4 6.85 5.90 4.39 5.14 1.72 0.76 53.33 45

better than non-acquired companies. Not surprisingly, given

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competent. Again, however, we emphasise that this disciplinary

(iii) Operating Performance of Combined Firms

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RAHMAN AND LIMMACK

þ4 9.93 15.27 4.28 4.04 4.03a 11.23a 71.28 94

þ5 8.85 11.77 4.09 3.98 3.98a 7.79b 63.83 94

PERFORMANCE OF MALAYSIAN COMPANIES

As explained earlier, we also calculate the median of the four

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