The Impact of the Financial Crisis on the Performance of European Acquisitions

Abstract

This study looks at the impact of the recent financial crisis on the short-term performance of European acquisitions. We use institutional theory and transaction cost economic theory to study whether bidders derive lower or higher returns from acquisitions announced after 2008. We investigate shareholders' stock price reaction to 2245 deals which occurred during 2004-12 across 22 European Union countries. Our results from both univariate and multivariate analysis show that the deals announced in the post-crisis period, corresponding to the period of economic recession, generate higher returns to shareholders as compared to acquisitions announced in the pre-crisis period. We also test the relevance of the IMPACT OF THE FINANCIAL CRISIS ON THE PERFORMANCE OF EUROPEAN ACQUISITIONS Rekha Rao Nicholson Julie SalaberShareholder wealth accretion is difficult to predict under most circumstances Kan, 2006, Cartwright andSchoenberg, 2006) and it can become a herculean task when cast under the shadows of a financial crisis (Mody and Negishi, 2000). In this chapter, we examine the under-explored effects of macroeconomic environment, that is the role of a supra-national institution like the Economic and Monetary Union (EMU), on the value creation ability of mergers and acquisitions (M&As) for investors during the financial turmoil.We look at European acquisitions undertaken before and after the 2007-08 financial crisis to ascertain short-term shareholder returns. The majority of earlier studies either looked at domestic versus international aspects of M&A deals without paying attention to the regional and supra-national arrangements integrating different countries, or they have examined the performance of M&A deals during 'normal' times which leaves out the effects of financial instability/economic recession within and across a political/economic union as a question yet to be answered.In this study, we look at acquisitions across 22 European Union (EU) countries (both EMU and non-EMU) and expect countries within the EMU to experience similar institutional constraints from the economic slowdown (Rose and Spiegel, 2012). By investigating the performance of European cross-border mergers and acquisitions before and after the financial crisis, our study fills a gap in the literature and links two interesting and equally important topics: cross-border M&A activity and performance within an economic union (Cartwright and Schoenberg, 2006) and the impact of a crisis on business performance (Chau et al., 2012). Our study extends the argument on how a crisis will impact short-term returns on companies' inorganic growth strategy through mergers and acquisitions. BACKGROUND AND HYPOTHESES

Impact of the Financial Crisis on Banking Acquisitions: A Look at Shareholder Wealth

“…On the other hand, abnormal returns in excess of the local stock market index were calculated instead of the MSCI country index (although some countries do not have a local market index). Moreover, instead of using the market model to compute abnormal returns, the modified market model used in several event studies was estimated (Bouwman, Fuller, and Nain 2009;Brown and Warner 1985;Nicholson and Salaber 2013;Rao-Nicholson and Salaber 2014b), where abnormal returns at day τ are equal to the difference between bidder returns and market returns: AR iτ = R iτ -R mτ . Overall, the results were consistent, and sometimes stronger, under different specifications of CAR.…”

“…The years 2007 and 2008 have been defined as the crisis period in several studies (Beltratti and Paladino 2013;Beltratti and Stulz 2012;Rao-Nicholson and Salaber 2014b). Authors have discussed the reckless risks undertaken by managers in the financial sector and the unintended outcomes of these risks leading to untenable losses and eventual bankruptcy of several financial institutions.…”