Do large South African acquisitions result in post-acquisition improvements in cash flow returns?

Master Thesis


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University of Cape Town

The purpose of this study is to evaluate whether South African acquisitions result in success, with success measured as post-acquisition improvements in cash flow returns. The reason for this approach is the view that a firm's intrinsic value is coupled to its long-term cash-generating ability. Post-acquisition change in cash flow returns for large acquisitions made by JSE-listed firms over the period 1995 - 2009 were analysed. Cash flow returns were measured as free cash flow to the firm over capital employed. This measurement of cash flow return is neutral to the firm's financing decision and capital structure, thus facilitating a comparison between different firms. Changes in annual cash flow returns were measured over the period covering five years preceding and five years following completion of acquisitions. The cash flow returns of the acquiring firms were compared to benchmark returns of firms in the same sector which did not undertake major acquisitions. The study found in 22 of 24 tests that the benchmarked post-acquisition cash flow returns and EBITDA returns were not significantly different in relation to the benchmarked pre-acquisition returns. However, in two tests which adjusted for operating leases and used total returns over the pre-acquisition and post-acquisition periods, it was found that the difference in returns were significant. The sample of eleven firms is relatively small and any inferences about South African acquisitions in general should therefore be approached with care. The divergence in results between the individual firms within the sample, as well as the outlined sensitivities of observed results lend further support for this cautionary approach. Despite the limited number of acquisitions that occurred over the period, this study should contribute towards a better understanding of the overall value proposition of large South African acquisitions, as well as provide impetus for related future research.