Chapter

8
Empirical Tests of
M&A Performance

Issues in Empirical Studies

Attempt to determine effects of M&As
Measurement of combined returns to target
and bidder shareholders
Factors affecting magnitude of returns
Measurement of post-merger performance
Tests of alternative theories
Determine whether or not social value is
enhanced by mergers
Guides to management for merger planning
Chapter 8-2

Combined Returns in M&As

Measure combined returns to explain
cause of mergers
Positive: synergy and efficiency
Negative: agency costs, managerial
entrenchment
Zero: redistribution of wealth from bidder
(hubris)
Bulk of event study evidence suggests
mergers have positive returns on average
Chapter 8-3

Combined Returns in M&As

Research
Target Bidder Comb.
Paper
Year Window Return Return Return
Bradley et al 1988 -5,+5
31.8% 1.0%
7.4%
Kaplan,
1992 -5,+5
26.9% -1.5%
3.7%
Weisbach
Servaes

1991

-1,
resolve

23.6%

-1.1%

3.7%

Mulherin,
Boone

2000

-1,+1

20.2%

-0.4%

3.6%

Andrade et al 2001

-1,+1

16.0%

-0.7%

1.8%

Chapter 8-4

Combined Returns in M&As

More Analysis: Berkovitch, Narayanan (1993)
Correlation among target, bidder, total gains
Target & bidder have positive correlation
synergy driving force (but agency and hubris
present in some deals)
Banking industry high activity deregulation
Becher (2000) returns over 3% synergy
Brook et al (1998) positive stock reaction of
banks to deregulation
Houston et al (2001) mergers driven by cost
savings rather than revenue enhancement
Chapter 8-5

Target Returns in M&A

Targets almost always experience large gain in
shareholder wealth effects usually stem from
merger effects and not revaluation of target
firms
Cash deals usually create more target wealth
possibly due to taxes
Multiple bidders result in higher returns for
target
Target share prices have a positive run-up in
period prior to takeover announcement
Takeover premiums reflect bidders strategy of
making large preemptive bid
Chapter 8-6

Target Returns in M&As

(Method of Payment)
Research
Paper
Huang,
Walkling

Year Window Cash

1987
-1,0
29.3%

Asquith et al 1990
Servaes

1991

Andrade et al 2001

Mixed
23.3%

Stock
14.4%

-1,0

27.5%

32.2%

13.9%

-1,
resolve

26.7%

21.1%

20.5%

-1,+1

20.1%

NA

13.0%

Chapter 8-7

Target Returns in M&As

(Single vs. Multiple Bidders)
Research
Paper
Year Window Single Multiple
Bradley et al 1988 -20,+1 24.0% 26.0%
Servaes
1991
-1,
20.8% 30.5%
resolve
Schwert

1996

-42,-1

13.4%

12.7%

Chapter 8-8

Target Returns in M&As

(Target Stock Run-Up)
Research
Paper
Keown,
Pinkerton

Run-Up RunYear Window Up

1981 -25,-1 13.3%

Ancmnt.
Return
12.0%

Meulbroek

1992

-20,-1

13.0%

17.6%

Barclay,
Warner

1993

-30,-2

16.3%

15.0%

Schwert

1996

-42,-1

13.3%

10.1%

Schwert

2000

-63,-1

12.4%

9.6%
Chapter 8-9

Target Returns in M&As

(Target Premiums Received)
Research
Paper
Bradley
Jarrell et al

Year
1980
1988

Base Price Date

41 before offer
30 before offer

Premium
49%
53%

1993

10 before offer

23%

Cotter, Zenner 1994

30 before rumor

47%

Betton, Eckbo 2000

60 before offer

51%

Jennings,
Mazzeo

Chapter 8-10

Bidder Returns in M&As

Bidder returns are more negative in stock deals
than cash deals
Returns to bidder are lower in deals with
multiple bidders
Do bad bidders become good targets? (Mitchell
and Lehn, 1990)
More negative market reaction to a deal, the
more likely firm is future takeover target
Takeovers can be both a problem and a
solution
Chapter 8-11

Bidder Returns in M&As

(Method of Payment)
Research
Paper
Year Window Cash
Travlos
1987 -10,+10 -0.1%
Asquith et al 1990
-1,0
0.2%

Mixed
NA
-1.5%

Stock
-1.6%
-2.4%

Servaes

1991

Andrade et al 2001

-1,
resolve

3.4%

-3.5%

-5.9%

-1,+1

0.4%

NA

-1.5%

Chapter 8-12

Bidder Returns in M&As

(Single vs. Multiple Bidders)
Research
Paper
Year Window Single Multiple
Bradley et al 1988 -20,+1
2.8%
-0.4%
Servaes
1991
-1,
-0.4% -2.97%
resolve
Schwert

1996

-42,-1

1.9%

0.2%

Chapter 8-13

Takeover Regulation and Hostility

Effect of the Williams Act act did not change
combined returns, but increased premiums
offered by bidders
Impediments in the 1980s decline in takeovers
in late 80s was due to economic conditions, not
the many state laws and defenses
Is hostility in the eyes of the beholder?
(Schwert, 2000) finds that hostile takeovers
are usually due to strategic choices by the
bidder, not entrenched management
Chapter 8-14

Postmerger Operating Performance

Difficult to isolate postmerger effects
Mergers often are part of industry shocks
Hard to find appropriate benchmarks
Healy, Palepu, Ruback (1992) accounting data
of 50 large mergers
Operating cash flow increases relative to industry
(driven by improved asset turnover)
Cash flow improvement positively related to
announcement stock returns
Andrade, Mitchell, Stafford (2000) large
sample, accounting data improvement in
operating performance relative to industry peers
Chapter 8-15

Long Term Stock Performance

Difficult studying stock prices over long
time periods cant isolate effects of
event being studied
Studies use buy and hold returns (equal
and/or value weighted), and cumulative
abnormal returns
Long term price performance following
merger is insignificantly different from
zero
Results sensitive to estimation methods
Chapter 8-16

Long Term Stock Performance

Overall Results
Researchers Year Method
Loughran,
1997 5 yr. EW BHAR
Vijh

Stock
Return
-6.5%

Rau,
Vermaelen

1998 3 yr. CAR

-4.0%

Mitchell,
Stafford

2000 3 yr. EW BHAR

3 yr. VW BHAR

-1.0%
-3.8%
Chapter 8-17

Long Term Stock Performance

Form of Payment
Researchers Year Method
Stock Ret.
Loughran,
1997 5 yr. EW BHAR (Cash)
18.5%
Vijh
5 yr. EW BHAR (Stock)
-24.2%
Mitchell,
Stafford

2000 3 yr. VW Cal. (Cash)

3 yr. VW Cal. (Stock)

3.6%
-4.3%

Book to Market Ratio

Rau,
1998 3 yr. CAR (Value)
Vermaelen
3 yr. CAR (Growth)

7.64%
-17.3%

Mitchell,
Stafford

1.1%
-7.2%

2000 3 yr. VW Cal. (Value)

3 yr. VW Cal. (Growth)

Chapter 8-18

Efficiency vs. Market Power

Alternative explanation for positive returns of
mergers may be easier collusion among firms
Which firms are subject to antitrust enforcement?
(Ellert, 1976) found mergers facilitate efficient
allocation of resources
Effect of mergers on rival firms Stillman (1983),
Eckbo (1983)
If merger collusive, industry rivals should gain
Samples of mergers either showed no effect
(Stillman), or positive (Eckbo)
Antitrust filings had no effect on industry rivals:
inconsistent with market power explanation (E)
Chapter 8-19

Efficiency vs. Market Power

Analysis of Industry Spillovers
Going private transactions (Slovin et al, 1991) -+1.3% return to industry rivals signals positive
intra-industry info
Mitchell & Mulherin (1996) +0.5% return to
rivals reflects industry restructuring
Song & Walkling (2000) size of positive return
reflects likelihood firm becomes future target
Vertical & horizontal mergers (Fan, Goyal, 2002)
Positive returns: similar in vertical and horizontal
Similarity implies that gains in horizontal mergers
are due to efficiency, not market power
Chapter 8-20

Effects of Concentration
Impact on Macroconcentration (White, 2002)
Importance: large firms have potential economic
power, small firms more innovative
Share of 200 largest total asset firms: 44%
(1958), 38% (1977), 32% (1988)
Employment share of largest 1000: 27% (1988),
26% (1993), 27% (1999)
Aggregate concentration about the same despite
two decades of merger activity
Concentration data is for US international
activity making national measurement less
relevant
Chapter 8-21

Effects of Concentration
Impact on Microconcentration
Weighted average level of industry
concentration relatively constant 40%
during 1960s and 70s (Scherer, 1980)
Microconcentration measures ignore
international competition (Weston, 1982)
Share of top 4 US steel producers: 52%
domestic, 14% world production
75 industries: 50% domestic, 25%
world production
Chapter 8-22