M&A - Points to Refresh Weston's Book Ch.8

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 [1983].
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)
Servaes (1991)
Mulherin and Boone(2000)
Andrade, Mitchell, and Stafford (2001)