M&As performance in the European financial industry

This paper looks at the performance record of M&As that took place in the European Union financial industry in the period 1998–2002. First, the paper reports evidence on shareholder returns from the merger. Merger announcements implied positive excess returns to the shareholders of the target company around the date of the announcement, with a slight positive excess-return on the 3-months period prior to announcement. Returns to shareholders of the acquiring firms were essentially zero around announcement. One year after the announcement, excess returns were not significantly different from zero for both targets and acquirers. The paper also provides evidence on changes in the operating performance for the subsample of merges involving banks. M&As usually involved targets with lower operating performance than the average in their sector. The transaction resulted in significant improvements in the target banks performance beginning on average 2 years after the transaction was completed. Return on equity of the target companies increased by an average of 7%, and these firms also experience efficiency improvements.     

Dressed to merge — small fits fine: M&A success in the fashion and accessories industry

In this paper we examine the value implications of 192 M&A transactions in the fashion and leather accessories industry during the period from 1994 to 2009. Contrary to general cross-country evidence we find highly significant, positive abnormal returns to acquiring shareholders. Cross-sectional analysis further reveals that the key value drivers are diversifying fashion M&A transactions for smaller, profitable companies that reduce idiosyncratic risk whereas deals executed by large companies that act as frequent acquirers do not, on average, significantly enhance shareholder wealth.     

Revisiting the merger and acquisition performance of European banks

The study examines the value creation of Merger and Acquisition (M&A) deals in European banking from 1990 to 2004. This is performed, first, by examining the stock price reaction of banks to the announcement of M&A deals and, second, by analysing the determinants of this reaction. The findings provide evidence of value creation in European banks as the shareholders of the targets have benefited from positive and (statistically) significant abnormal returns while those of the acquirers earn small negative but non-significant abnormal returns. In the case of the shareholders of the acquirers, domestic M&As and especially those between banks with shares listed on the stock market, seem to be more beneficial compared to cross-border ones or those when the target is unlisted. Shareholders of the targets earn in all cases positive abnormal returns. Finally, although the link between abnormal returns and fundamental characteristics of the banks is rather weak, it appears that the acquisition of smaller, less efficient banks generating more diversified income is more value creating, while acquisition of less efficient, liquid and characterised by higher credit risk banks is not a value creating option.     

Separation of Ownership from Control and Acquiring Firm Performance: The Case of Family Ownership in Canada

Abstract:   This study investigates the relationship between ownership structure and acquiring firm performance. A large proportion of Canadian public companies have controlling shareholders (families) that often exercise control over voting rights while holding a small fraction of the cash flow rights. This is achieved through the concurrent use of dual class voting shares and stock pyramids. Many suggest that these ownership structures involve larger agency costs than those imposed by dispersed ownership structures and that they distort corporate decisions with respect to investment choices such as acquisitions. We find that average acquiring firm announcement period abnormal returns for our sample of 327 Canadian transactions are positive over the 1998–2002 period. Cash deals, acquisitions of unlisted targets and cross‐border deals have a positive impact on value creation. Governance mechanisms (outside block‐holders, unrelated directors and small board size) also have a positive influence on the acquiring firm performance. Further, the positive abnormal returns are greater for family firms. We do not find that separation of ownership and control has a negative impact on performance. These results suggest that, contrary to other jurisdictions offering poor minority shareholder protection or poor corporate governance, separation of control and ownership is not viewed as leading to value destroying mergers and acquisitions, i.e., market participants do not perceive families as using M&A to obtain private benefits at the expense of minority shareholders. We do find a non‐monotonic relationship between ownership level and acquiring firm abnormal returns. Ownership of a majority of the cash flow rights has a negative impact on announcement returns. This is consistent with the view that large shareholders may undertake less risky projects as their wealth invested in the firm increases.     

An empirical investigation of mergers and acquisitions by Chinese listed companies, 1997–2007

We examine 136 M&A deals from 1997 to 2007 initiated by Chinese companies listed on the Shanghai and Shenzhen Stock Exchanges, where the acquirer gains complete control of the target. Our data shows that the Chinese M&A market is dominated by domestic deals with unlisted targets that are either stand-alone private firms or wholly owned subsidiaries. Acquirers experience significant positive abnormal stock returns around the announcement date and over the three years after the acquisition. These results are largely driven by state-owned firms, cash acquirers and firms that acquire related targets. Cross-sectional tests show that announcement period returns are related to the acquirer's ownership status, industry relatedness of the acquirer and target, capital structure changes of the acquirer and the nature of the unlisted target. We find no change in operating performance from the pre to the post acquisition period for the acquirers.     

The Performance of the European Market for Corporate Control: Evidence from the Fifth Takeover Wave

This paper presents an in‐depth analysis of the performance of large, medium‐sized, and small corporate takeovers involving Continental European and UK firms during the fifth takeover wave. We find that takeovers are expected to create takeover synergies as their announcements trigger statistically significant abnormal returns of 9.13% for the target and of 0.53% for bidding firms. The characteristics of the target and bidding firms and of the bid itself are able to explain a significant part of these returns: (i) deal hostility increases the target's but decreases bidder's returns; (ii) the private status of the target is associated with higher bidder's returns; and (iii) an equity payment leads to a decrease in both bidder's and target's returns. The takeover wealth effect is however not limited to the bid announcement day but is also visible prior and subsequent to the bid. The analysis of pre‐announcement returns reveals that hostile takeovers are largely anticipated and associated with a significant increase in the bidder's and target's share prices. Bidders that accumulate a toehold stake in the target experience higher post‐announcement returns. A comparison of the UK and Continental European M&A markets reveals that: (i) the takeover returns of UK targets substantially exceed those of Continental European firms. (ii) The presence of a large shareholder in the bidding firm has a significantly positive effect on takeover returns in the UK and a negative one in Continental Europe. (iii) Weak investor protection and low disclosure in Continental Europe allow bidding firms to adopt takeover strategies enabling them to act opportunistically towards the target's incumbent shareholders.     

Where M&A Pays and Where It Strays: A Survey of the Research

This article uses a large and growing body of academic studies to refute the popular notion that corporate mergers and acquisitions generally fail to increase productivity and end up reducing shareholder value. A careful review of the evidence starts by con. rming the obvious–namely, that the shareholders of selling firms earn large returns from M&A–and goes on to demonstrate an economic reality that is not widely understood: shareholders of acquirers generally earn about the required rate of return on investment, and hence M&A is at least a value-maintaining proposition.
Of greatest interest to corporate practitioners, however, is the very large dispersion of outcomes that underlies the average returns. Closer inspection of this variability shows that certain circumstances and company characteristics are reliably associated with value-increasing M&A. In particular, acquisitions of related companies tend to be better received by the market and to produce higher post-merger operating returns than diversifying transactions (though there are a number of successful instances of the latter). Other fairly reliable indicators of value-increasing M&A are transactions involving mergers of equals or smaller, private targets (where the bidding competition is less intense) and deals structured as earnouts and financed primarily with cash rather than stock.     

The certification role of financial advisors in cross-border M&As

This paper examines the determinants of the choice of financial advisors and their impact on the announcement effects of US acquirers in cross-border M&As. Two hypotheses are tested: one pertains to the certification role of financial advisors, and the other relates to advisors' experience in target countries. Evidence supports the certification hypothesis in the selection of advisors, particularly in all-cash paid transactions where acquirers assume the entire risk of not realizing the expected synergy value. We also observe significantly more favorable shareholder reactions to the choice of US-domiciled advisors and foreign-domiciled advisors actively doing business in US markets. The fact that this positive reaction exists when the chosen US advisors do not have significant experience in the target country suggests how much US acquirers and shareholders value the certification role of financial advisors in cross-border M&As.     

Synergy disclosures in mergers and acquisitions

We examine bidding firms' motives for disclosing a synergy forecast when announcing a merger or acquisition. Our sample consists of 1990 M&A deals, of which 345 announce synergy estimates. Our results suggest that synergy disclosures serve to obtain a more favorable market reception for deals that would otherwise induce highly negative bidder announcement returns. After controlling for the endogeneity of the disclosure decision, synergy forecast disclosures result in approximately 5% higher bidder stock returns. The main deterrents of disclosing synergy values are lack of precise information on synergy values available to bidding firm management, and shareholder litigation risk. Bidders do not seem to use synergy disclosures to strategically influence takeover premiums or competition for the target.     

An international study of shareholder protection in freeze-out M&A transactions

Freeze-out M&A transactions are those initiated by controlling shareholders to acquire minority shareholders' ownership in the firm. We compare international freeze-out mergers in 35 countries in merger premium, choice of payment, and completion probability. We find greater merger premium and probability of cash payment but lower deal completion rates in countries with stronger minority shareholder protection. Using detailed minority shareholder protection indexes, we find some evidence that the ex-post anti-self-dealing law enforcement is more important than the ex-ante anti-self-dealing law regulation in protecting minority shareholder value. Our study provides new evidence of minority shareholder protection in the setting of conflicts of interest between majority and minority shareholders.     

Bank mergers and acquisitions in emerging markets: evidence from Asia and Latin America

Following a global wave of consolidation in the banking industry, this study analyses 132 mergers and acquisitions (M&As) involving banks in emerging markets in Asia and Latin America between 1998 and 2009. An event study measures the change in shareholder value for acquirers and targets; and a multivariate regression identifies the drivers of the change in shareholder value for acquirers. On average M&As create shareholder value for target firms, while acquirer firms do not lose shareholder value. Geographical diversification creates shareholder value for acquirers. Acquirer shareholders benefit from the acquisition of underperforming targets; from transactions settled by cash rather than exchange of equity; and from government-instigated M&A transactions.     

The impact of institutional investors on mergers and acquisitions in the United Kingdom

In this paper we investigate the impact of institutional ownership on UK mergers and acquisitions. We employ a comprehensive sample of M&As conducted by UK acquirers from 2000 to 2010, thus including a full cycle of peak and trough in M&A waves. We find that institutional investors increase the likelihood of an M&A to be a large, cross-border deal, opting for full control. Moreover, institutional ownership concentration and foreign institutional ownership increase the likelihood of cross-border M&As. In addition, we assess the influence of institutional shareholders’ investment horizon and find that while investment horizon have a negative influence in encouraging cross-border M&As, the presence of long-term investors encourages larger M&As. Finally, even after controlling for the 2007–08 financial crisis the market reacts negatively to the announcement of cross-border M&As.     

Shareholder litigation in mergers and acquisitions

Using hand-collected data, we examine the targeting of shareholder class action lawsuits in merger and acquisition (M&A) transactions, and the associations of these lawsuits with offer completion rates and takeover premia. We find that M&A offers subject to shareholder lawsuits are completed at a significantly lower rate than offers not subject to litigation, after controlling for selection bias, different judicial standards, major offer characteristics, M&A financial and legal advisor reputations as well as industry and year fixed effects. M&A offers subject to shareholder lawsuits have significantly higher takeover premia in completed deals, after controlling for the same factors. Economically, the expected rise in takeover premia more than offsets the fall in the probability of deal completion, resulting in a positive expected gain to target shareholders. However, in general, target stock price reactions to bid announcements do not appear to fully anticipate the positive expected gain from potential litigation. We find that during a merger wave characterized by friendly single-bidder offers, shareholder litigation substitutes for the presence of a rival bidder by policing low-ball bids and forcing offer price improvement by the bidder.     

I Feel Your Pain: The Effect of Regulator as a Minority Shareholder on Merger and Acquisition Performance

We examine the effect of a regulator-led advocate for minority shareholders on merger and acquisition (M&A) performance in China. In recent years, the China Securities Regulatory Commission established the China Securities Investor Services Center (CSISC), which began its ownership of 100 shares of public firms in 2016. The CSISC advocates for the interests of minority shareholders proactively. Focusing on abnormal stock returns in M&A announcements, we find that acquirers that have the CSISC as a shareholder (CSISC acquirers) exhibit higher positive abnormal stock returns than non-CSISC acquirers. Cross-sectional analysis suggests that the core results are mainly driven by firms with severe agency problems and weak external/internal monitoring, and those not controlled by the state. In addition, we find that CSISC acquirers have better long-term performance and encounter more M&A failures than non-CSISC acquirers. Our findings indicate that although the CSISC only holds 100 shares of listed companies, it plays an effective role in monitoring and driving firms to make appropriate M&A decisions.     

Is more less? Propensity to diversify via M&A and market reactions

Mergers and acquisitions (M&As) could lead to a firm diversifying into new industries, and the impact of this may be related to the firm's prior diversification. Using a panel of 1030 M&A transactions from 2000 to 2010, we find that previously diversified firms are more likely to pursue industrially diversifying M&As. Both previous and contemporary diversification measures are not associated with the firm's cumulative abnormal returns (CARs) at time of announcement but have a lasting effect on various performance measures up to two years later. We find evidence supporting both a diversification discount and premium, which can be predicted by the sign of the CAR at the time of announcement. This suggests that while diversification is necessary to explain firm value, it is not sufficient.     

Shareholder investment horizons and the market for corporate control

This paper investigates how the investment horizon of a firm's institutional shareholders impacts the market for corporate control. We find that target firms with short-term shareholders are more likely to receive an acquisition bid but get lower premiums. This effect is robust and economically significant: Targets whose shareholders hold their stocks for less four months, one standard deviation away from the average holding period of 15 months, exhibit a lower premium by 3%. In addition, we find that bidder firms with short-term shareholders experience significantly worse abnormal returns around the merger announcement, as well as higher long-run underperformance. These findings suggest that firms held by short-term investors have a weaker bargaining position in acquisitions. Weaker monitoring from short-term shareholders could allow managers to proceed with value-reducing acquisitions or to bargain for personal benefits (e.g., job security, empire building) at the expense of shareholder returns.     

Do Chinese managers listen to the media?: Evidence from mergers and acquisitions

This study investigates whether listed companies in China are sensitive to public media coverage when making investment decisions regarding mergers and acquisitions (M&As). We find that the likelihood of abandoning a proposed M&A transaction is positively associated with negative media coverage, and this association is stronger with lower announcement abnormal returns. Our analysis demonstrates that the negative information effect is amplified for glamour acquirers. We argue that negative media reactions drive the external feedback mechanism of M&A attempts and help guard against managerial hubris.     

Do mega-mergers create value? The acquisition experience and mega-deal outcomes

Existing literature shows that mega-M&A deals valued over $500mil end up destroying the shareholder value of acquirers on a significant scale. Our paper considers mega-deal as a dependent event and examines the role of acquirer’s previous acquisition experience playing in the outcome of mega-deals. We find that mega-deals conducted by firms with a high level of acquisition experience, i.e. a firm completed at least 12 transactions before, are more likely to be completed. In addition, more experienced acquirers of mega-deals generate positive abnormal stock returns for shareholders in both short-run and long-run, with a dollar value gain of $50.6 million around deal announcement. We also find that more experienced acquirers are better at managing the post-acquisition integration process and enjoy a significant improvement in operating performance.     

The probability of informed trading and mergers and acquisitions

This paper investigates the role of the probability of informed trading (PIN) in mergers and acquisitions (M&A). We show that acquirers with higher PINs use more cash to finance their deals due to their higher cost of equity, and acquirers use more equity financing when acquiring targets with higher PINs to share the information risk with the target shareholders. We also find that acquirers and targets with higher PINs both experience higher announcement returns when cash financing is used, indicating that PINs are priced in the M&A market.     

Shareholder wealth gains through better corporate governance—The case of European LBO-transactions

We examine shareholder wealth effects in a heterogeneous sample of 115 European leveraged going private transactions from 1997 to 2005. Average abnormal returns as reaction to the LBO announcement amount to 24.20%. In cross-sectional regressions, we find that these value gains can largely be attributed to differences in corporate governance: on a macro level, abnormal returns for pre-LBO shareholders are larger in countries with a poor protection of minority shareholders. On a firm level, companies with a high pre-LBO free float and comparatively weak monitoring by shareholders tend to show high abnormal returns. Furthermore, companies that are undervalued with respect to an industry peer-group exhibit higher announcement returns, indicating that agency conflicts and/or market inefficiencies can serve as an explanation.