The effect of takeovers on the fundamental value of acquirers |
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Authors: | Paul M Guest Magnus Bild Mikael Runsten |
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Institution: | 1. Birkbeck College , Malet Street, London, WC1E 7HX E-mail: paul.guest@bbk.ac.uk;2. Stockholm School of Economics Research Institute , Stockholm, Sweden |
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Abstract: | This paper develops a new methodology to examine the financial impact of acquisitions, designed to address whether takeovers yield a positive net present value for the acquiring company. Specifically, we employ the residual income valuation method to compare the fundamental value of the acquiring company before acquisition with the fundamental value after acquisition.We apply this methodology to 303 UK acquisitions completed during 1985–1996, and compare the results with the effects of takeover on profitability and short‐ and long‐run share returns. We find that the impact of acquisition on fundamental value is slightly negative but statistically insignificant. This result differs from the effect of takeover on profitability, which is significantly positive, and the effect of takeover on share returns, which is significantly negative. |
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Keywords: | acquisitions fundamental value residual income profitability share returns |
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