What Do Returns to Acquiring Firms Tell Us? Evidence from Firms That Make Many Acquisitions

Abstract

We study shareholder returns for firms that acquired five or more public, private, and0or subsidiary targets within a short time period. Since the same bidder chooses different types of targets and methods of payment, any variation in returns must be due to the characteristics of the target and the bid. Results indicate bidder shareholders gain when buying a private firm or subsidiary but lose when purchasing a public firm. Further, the return is greater the larger the target and if the bidder offers stock. These results are consistent with a liquidity discount, and tax and control effects in this market.Takeovers are one of the most important events in corporate finance, both for a firm and the economy. Extensive research has shown that shareholders in target firms gain significantly and that wealth is created at the announcement of takeovers~i.e., combined bidder and target returns are positive!. However, we know much less about the effects of takeovers on the shareholders of acquiring firms. Evidence suggests that these shareholders earn, on average, a zero abnormal return at the acquisition's announcement, though there is tremendous variation in these returns. Researchers have been unable to successfully explain much of this variation, partially because the announcement of a takeover reveals information about numerous things. For example, Grinblatt and Titman~2002, p. 708! state that the stock return at the time of the bid cannot be completely attributed to the expected effect of the acquisition on profitability, arguing that, "the stock returns of the bidder at the time of the announcement of the bid may tell us more about how the market is reassessing the bidder's business than it does about the

What drives acquisitions?

“…Our results, which are not presented for brevity, are qualitatively similar and are available upon request. 13 This result is in line with the evidence of Chang (1998), Fuller, Netter andStegemoller (2002) and Doukas and Petmezas (2007) who document substantial gains in acquisitions of privately held firms. Consistent with the U.S. evidence, U.K. studies (Draper and Paudyal (2006), among others) report negative and significant bidder abnormal returns for public acquisitions surrounding merger announcements.…”

“…For the short-run analysis, we follow Fuller, Netter, and Stegemoller (2002) standard event study methodology and calculate Cumulative Abnormal Returns (CARs) for the five-day (-2, +2) period around the takeover announcement. 10 More specifically, we estimate the abnormal returns by using a modified market-adjusted model:…”

“…Consistent with the U.S. evidence, U.K. studies (Draper and Paudyal (2006), among others) report negative and significant bidder abnormal returns for public acquisitions surrounding merger announcements. 14 For further discussion see Fuller et al (2002). (LSE).…”

“…Given these shocks, mergers facilitate the change of firms to a new competitive environment. Merger activity comes in waves and returns to acquiring firms depend, among others, on the method of payment (Travlos (1987)), on the acquirer"s book to market ratio (Rau and Vermaelen (1998)) and size (Moeller, Schlingemann and Stulz (2004), and type of target (Fuller, Netter and Stegemoller (2002)). A more recent strand of the literature attempts to link takeover activity with stock market performance (high merger activity is correlated with high stock market valuations as shown by Jovanovic and Rousseau, (2001)).…”

Lost in transaction? The transfer effect of strategic consistency

“…In order to be included in the sample, the acquisition must have been reported as completed by a maximum of 1000 days after the announcement date (Moeller et al 2004). The bidder must have controlled less than 50 percent of the target shares prior to and more than 50 percent after the acquisition (Fuller et al 2002). For each acquisition, information on either deal value or target sales must have been available one fiscal year prior to the announcement date.…”