US MUTUAL FUND M&As

Financial support from IFM2 and SSHRC are gratefully acknowledged. The usual disclaimer applies. Please do not quote without the authors' permission. Abstract. We study M&A activity in the US mutual fund industry over the period 1962-2009. Any improvement in abnormal performance around M&As accrues primarily to target unitholders. The risk level of acquirers increases around such transactions. An analysis of the risk-return trade-off finds that low levels of risk do not yield greater mean-variance efficient portfolios after merger, but that higher levels of risk are associated with a loss in asset allocation efficiency for unitholders in the acquirer. The analysis of success determinants finds that bidder risk and MER post-M&A, and target past performance significantly affect the potential success of such M&As. 1. INTRODUCTION Business combinations represent an efficient avenue for growth. If the bid price is fair, mergers can allow for synergies in the employed physical and human capital and may lead to abnormal performances that are not obtainable with separate entities. The visibility of the newly created business, the range of products offered, the quality of the service, the targeted market, the geographic diversification, and the expertise of the new management team are all arguments in favour of merger activity. 1 This stylized fact is supported in the literature for firms in, for example, manufacturing and services (e.g., As Jayaraman et al. (2002) argue the exponential growth in the mutual fund industry has led to consolidation in the financial services industry since the early 2000s. Jayaraman et al. (2002) find that target funds are significantly smaller in asset size, incur higher expense ratios, and perform poorly compared to acquiring funds over the five-year study period (1994-1997). The target (acquiring) fund's performance improves (deteriorates) in the first year post-merger and the expense ratio for the combined fund is similar to that of the acquiring fund pre-merger. Perold and Salomon (1991) link the higher size of assets under management (AUM) after merger to greater scale economies resulting from decreased fixed operating costs. The objective of this paper is to extend the work of Jayaraman et al. (2002) by examining the pre-merger conditions of each merger participant separately and the post-1 We use the terms 'merger' and 'M&As or mergers and acquisitions' interchangeable throughout this paper. 3 merger impact of the merger on the acquiring funds for 6,680 mergers over the period 1962-2009. To this end, we examine the effects of …