Empirical Tests of Empirical Tests of M&A PerformanceM&A Performance

88ChapterChapter

Chapter 8-2

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 8-3

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 8-4

Combined Returns in M&AsResearch

Paper Year WindowTarget Return

Bidder Return

Comb. Return

Bradley et al 1988 -5,+5 31.8% 1.0% 7.4%Kaplan, Weisbach

1992 -5,+5 26.9% -1.5% 3.7%

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 8-5

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 8-6

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 bidder’s strategy of making large preemptive bid

Chapter 8-7

Target Returns in M&As(Method of Payment)

Research Paper Year Window Cash Mixed Stock

Huang, Walkling

1987 -1,0 29.3% 23.3% 14.4%

Asquith et al 1990 -1,0 27.5% 32.2% 13.9%

Servaes 1991 -1, resolve

26.7% 21.1% 20.5%

Andrade et al 2001 -1,+1 20.1% NA 13.0%

Chapter 8-8

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,

resolve20.8% 30.5%

Schwert 1996 -42,-1 13.4% 12.7%

Chapter 8-9

Target Returns in M&As(Target Stock Run-Up)

Research Paper Year

Run-Up Window

Run-Up

Ancmnt. Return

Keown, Pinkerton

1981 -25,-1 13.3% 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 8-10

Target Returns in M&As(Target Premiums Received)

Research Paper Year Base Price Date Premium

Bradley 1980 41 before offer 49%Jarrell et al 1988 30 before offer 53%

Jennings, Mazzeo

1993 10 before offer 23%

Cotter, Zenner 1994 30 before rumor 47%

Betton, Eckbo 2000 60 before offer 51%

Chapter 8-11

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 8-12

Bidder Returns in M&As(Method of Payment)

Research Paper Year Window Cash Mixed Stock

Travlos 1987 -10,+10 -0.1% NA -1.6%Asquith et al 1990 -1,0 0.2% -1.5% -2.4%

Servaes 1991 -1, resolve

3.4% -3.5% -5.9%

Andrade et al 2001 -1,+1 0.4% NA -1.5%

Chapter 8-13

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,

resolve-0.4% -2.97%

Schwert 1996 -42,-1 1.9% 0.2%

Chapter 8-14

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 8-15

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 8-16

Long Term Stock Performance Difficult studying stock prices over long

time periods – can’t 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 8-17

Long Term Stock Performance

Overall Results

Researchers Year MethodStock Return

Loughran, Vijh

1997 5 yr. EW BHAR -6.5%

Rau, Vermaelen

1998 3 yr. CAR -4.0%

Mitchell, Stafford

2000 3 yr. EW BHAR3 yr. VW BHAR

-1.0%-3.8%

Chapter 8-18

Long Term Stock PerformanceForm of PaymentResearchers Year Method Stock Ret.Loughran, Vijh

1997 5 yr. EW BHAR (Cash)5 yr. EW BHAR (Stock)

18.5%-24.2%

Mitchell, Stafford

2000 3 yr. VW Cal. (Cash)3 yr. VW Cal. (Stock)

3.6%-4.3%

Book to Market RatioRau, Vermaelen

1998 3 yr. CAR (Value)3 yr. CAR (Growth)

7.64%-17.3%

Mitchell, Stafford

2000 3 yr. VW Cal. (Value)3 yr. VW Cal. (Growth)

1.1%-7.2%

Chapter 8-19

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 8-20

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 8-21

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 8-22

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