Chapter 8. Empirical Tests of M&A Performance
Main topics of the chapter
Evidence on the combined return to target and bidder shareholders in M&A transactions.
Factors found to affect the magnitude of target returns
Factors found to affect the magnitude of bidder returns
Takeover Regulation and Takeover Hostility
Long-Term Stock Price Performance following Mergers
Efficiency versus Market Power
Effects of Concentration
The combined returns in mergers and acquisitions
Are mergers net positive value investments?
Mergers theories based on synergy and efficiency predict that the combined return in a merger is positive.
Theories based on the agency costs of free cash flow and managerial entrenchment argue that mergers destroy wealth and predict that the combined returns in a merger are negative.
Roll’s(1986) hubris hypothesis suggested that any wealth gain target firms merely represents redistribution from bidders and predicts that the net merger gains are zero.
Event study evidence
Early evidence by Jensen and Ruback .
Found that mergers created wealth for target shareholders and were roughly a break-even endeavour for bidders.
This evidence was generally taken to indicate that mergers created wealth.
Roll (1986) observed that bidders are often much larger than targets.
Hence combined return is to be calculated by determining the size-weighted return.
Results of studies that were done after Roll’s criticism.
Bradley, Desai, and Kim (1988)
Kaplan and Weisbach (1992)
Mulherin and Boone(2000)
Andrade, Mitchell, and Stafford (2001)