Is the M&A announcement effect different across Europe? More evidences from continental Europe and the UK

The United Kingdom (UK) and Continental Europe are two of the most dynamic markets for mergers and acquisitions in the world. Using a sample of 2823 European acquisitions announced between 2002 and 2010, we investigate the effect of M&A announcements on stock returns of acquiring companies located in Continental Europe and the UK. The analysis is based on characteristics of takeover transactions such as method of payment, listing status of the target company, geographic scope (cross-border vs. domestic), industry relatedness of the bidding and the target company, amongst other factors. We find that European bidders earn positive abnormal returns both in cross-border and domestic acquisitions, and there is a significant difference between the abnormal returns of stock and cash deals, and between acquisitions of listed and unlisted target companies. However, the cross-border wealth effects are not significantly different between the UK and Continental Europe. We find that bidding firm’s shareholders gain more in equity than in cash offers if they are located in the UK and if they acquire unlisted targets. Cash bids for listed targets are associated with higher abnormal returns for bidders located in Continental Europe. We do not find supportive evidence that industry diversification destroys value for shareholders of both Continental European and the UK bidders.     

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 role of investment banks in M&A transactions: Fees and services

We examine the pricing and performance of advisers in M&A transactions. We determine adviser quality on the basis of a contemporaneous market share measure and show that high quality advisers receive higher M&A advisory fees. High quality advisers also complete deals faster, but their superiority is not reflected in increasing the likelihood of deal completion or delivering greater abnormal equity returns to their clients. It is well known that stock bids are received more negatively than cash bids, so we further partition the sample of acquirers by consideration type and examine the abnormal returns of each partition. We find that high quality investment banks are able to differentiate themselves by delivering greater abnormal returns to their acquirer clients in deals involving stock.     

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.     

Revisiting acquirer returns: Evidence from unanticipated deals

This paper examines the implications of market anticipation of impending merger and acquisition (M&A) deals on the assessment of acquirer wealth effects through event study methods. We find evidence suggesting that prior studies have understated the gains to acquirers. The documented negative or near-zero abnormal returns to acquirers appears to be confined to sub-samples of highly-anticipated deals. By contrast, unanticipated acquirers gain significantly from M&As, achieving average cumulative abnormal returns of 5.4% to 7.5% in the seven days around the bid announcement. Empirically, we show that market anticipation partly explains (1) the documented low returns to acquirers, (2) the positive abnormal return spillover to close rivals of acquirers, and (3) the declining returns to serial acquirers across successive deals. Overall, our study provides evidence against several stylised facts and sheds light on the puzzle that M&A activity persists despite recurrent research findings that they do not create value for acquirers.     

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.     

Stock option grants to target CEOs during private merger negotiations

Unscheduled stock options to target chief executive officers (CEOs) are a nontrivial phenomenon during private merger negotiations. In 920 acquisition bids during 1999-2007, over 13% of targets grant them. These options substitute for golden parachutes and compensate target CEOs for the benefits they forfeit because of the merger. Targets granting unscheduled options are more likely to be acquired but they earn lower premiums. Consequently, deal value drops by $62 for every dollar target CEOs receive from unscheduled options. Conversely, acquirers of targets offering these awards experience higher returns. Therefore, deals involving unscheduled grants exhibit a transfer of wealth from target shareholders to bidder 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.     

Top-tier financial advisors,expropriation and Chinese mergers & acquisitions

The empirical literature contains mixed evidence regarding the relationship between advisor reputation and returns in mergers and acquisitions (M&As). However, very few studies consider the detrimental effect of expropriation by controlling shareholders and value creation role of top-tier financial advisors. We revisit the role of financial advisors in M&As by examining whether and why top-tier advisors affect acquisition quality in the Chinese market, finding that they generate substantial value for acquiring shareholders, though value creation is lower for high expropriation-possibility acquirers. We also show that top-tier financial advisors help improve operating performance and reduce bid premiums. The results contribute to the takeover literature by shedding new light on the role of financial advisor in acquisitions.     

Family control and dilution in mergers

We analyze the influence of the level as well as the change in family ownership on value creation in mergers involving newly public firms. Our findings suggest that acquirers with low levels of family ownership earn lower abnormal returns than do those with high levels of ownership. In addition, families with low ownership in their firm are more likely to use cash as the medium of exchange, thus avoiding dilution and maintaining their control. Further, acquisitions of targets with low levels of family ownership are associated with greater value creation. Our results are consistent with the entrenchment of families at low levels of ownership and a better alignment of their interests with those of minority shareholders at high levels of ownership. Finally, we find that dilution of the family’s ownership, due to the use of stock as the medium of exchange, alters the family’s incentives and thus influences firm value.     

Does venture capital syndication affect mergers and acquisitions?

We find that venture capital (VC) syndicate-backed targets receive higher acquisition premiums and spend more time negotiating transaction terms. The acquirers of syndicate-backed targets receive lower cumulative abnormal returns surrounding the acquisition announcement, but they outperform the individual-backed targets in the long-term. We show that VC syndication creates value for entrepreneurial firms by leading to larger and more independent boards of directors prior to acquisition. It also leads to better incentive alignment between the CEO and the shareholders of the acquiring firm. In addition, syndicate-backed targets prefer stock as the method of payment in mergers and acquisitions. Collectively, we show that VC syndication creates value for both entrepreneurial firms and their acquirers in the long-term.     

Liquidity and information asymmetry considerations in corporate takeovers

ABSTRACT

We examine how stock market liquidity and information asymmetry considerations influence the wealth effects of Mergers and Acquisitions (M&As). We present a simple model predicting that M&As of listed targets that have relatively illiquid stocks are profitable for acquirers due to (a) the weak bargaining power of the targets’ shareholders, and (b) the limited information asymmetry concerns when evaluating takeover synergies. Our results show that cash-financed M&As of listed targets that have relatively illiquid stocks are associated with an increase in acquirer risk-adjusted returns. These gains are equivalent to those realized from comparable private target M&As. When engaging in stock-financed listed-target M&As, acquirers with liquid stocks enjoy significant gains when the targets have relatively illiquid stocks. This result holds especially when the deal is announced during periods of deterioration in the overall stock market liquidity. Lastly, we find that liquidity considerations affect the acquirer’s choice of the target firm’s listing status, as well as the M&A method of payment.     

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.     

Can Stock Markets Predict M&A Failure? A Study of European Transactions in the Fifth Takeover Wave

In this paper we develop various measures of M&A failure for an intra‐European sample during the fifth takeover wave: inferior long‐term stock performance, inferior operating performance, and target divestment. After documenting the extent of M&A failure, we test the relation between short‐term abnormal returns at deal announcement and M&A failure. We examine a sample where listed bidders acquire listed targets (267 deals) as well as privately‐held targets (336 deals). Our results indicate M&A failure rates up to 50% in both samples. When acquirers and targets are listed, lower M&A announcement returns are consistently and significantly associated with higher M&A failure probabilities and long‐term losses. In contrast, when targets are privately held, we find no evidence of such an association.     

Indexing mergers and acquisitions

We measure the efficiency of mergers and acquisitions by putting forward an index (the ‘M&A Index’) based on stochastic frontier analysis. The M&A Index is calculated for each takeover deal and is standardized between 0 and 1. An acquisition with a higher index encompasses higher efficiency. We find that takeover bids with higher M&A Indices are more likely to succeed. Moreover, the M&A Index shows a strong and positive relation with the acquirers’ post-acquisition stock performance in the short run and operating performance in the long run. After constructing three portfolios under a buy-and-hold strategy, we find that efficient portfolios with the highest indices earn higher equity returns and monthly alphas than inefficient portfolios with the lowest indices. Overall, our findings indicate that the M&A Index is positively associated with merger outcomes for acquirers.     

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.     

Target's organisational form and returns to Australian bidders in cross‐border acquisitions

We present large sample evidence on return performances of Australian acquirers who bid for public and private targets in cross‐border acquisitions. While placing a particular emphasis on the method of payment and the shareholder protection offered by the target country, we analyse the impact of various bid, firm and foreign‐acquisition‐specific characteristics on bidding firms' abnormal returns. We find that Australian investors perceive cross‐border acquisitions as value‐creating exercises regardless of the organisational form of the target acquired. However, bidders for private targets earn higher return when the method of payment is stock and the targets are located in high investor protection countries. We further find that the abnormal returns are conditional to the relative size of the target, bid frequency, target country destination and the preacquisition financial performance of bidding firms.     

Pre-deal differences in corporate social responsibility and acquisition performance

Drawing on the portability theory, we examine how the pre-deal gap in corporate social responsibility (CSR) between the bidder and target affects announcement returns in the international takeover market. We find that the higher the bidder's CSR scores relative to the target's, the higher is the synergy captured by combined cumulative abnormal returns of bidders and targets. It supports our hypothesis that synergistic gains are higher when the ex-ante bidder-target CSR gap is positive. The results also show that the synergy effect of CSR is not shared between bidder and target firms; thereby, bidders earn abnormal returns while targets lose. We further document that the acquirers with higher CSR practices before the acquisition are more likely to engage in related and non-cash-financed deals, and capital markets reward these acquisition choices. Finally, the results show that a positive CSR gap reduces the takeover premium and the time taken to complete the deal. Overall, the results suggest a positive valuation for the shareholders of the combined firm resulting from the portability of higher CSR practices from bidders to targets. Our results are subject to a battery of robustness tests, including alternative measures of combined returns and CSR, and tests for endogeneity.     

Liquidity and Returns to Target Shareholders in the Market for Corporate Control: Evidence from the US Markets

In this paper we analyze how stock market liquidity affects the abnormal return to target firms in mergers and tender offers. We predict that target firms with poorer stock market liquidity receive larger announcement day abnormal returns based on the following considerations. First, target firms with poorer stock market liquidity receive greater liquidity improvements after a merger or tender offer. Second, deals that involve less liquid targets are less anticipated and/or more likely to be completed. Third, less liquid stocks have more diverse reservation prices across shareholders and thus require a higher takeover return. Consistent with these expectations, we show that abnormal returns to target firms’ shareholders are significantly and positively related to the difference in liquidity (measured by the bid‐ask spread) between acquirers and targets as well as the magnitude of target firms’ liquidity improvement.