Stock Returns in Mergers and Acquisitions

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Abstract

Over the past three decades, mergers and acquisitions (M&A) have constituted an important corporate growth strategy. Mergers and acquisitions increased dramatically between 1980 and 2009 in both number and size of deals. Given the popularity of M&A as a corporate growth strategy, it is important to understand whether mergers increase shareholder value for corporations that undertake them. Mergers can benefit companies and shareholders by providing economies of scale and scope, increasing market share and market power, eliminating redundant corporate expenses, and lowering the cost of capital, among other potential benefits. In this paper we will discuss stock returns in merger and acquisition. We will show a broader compass of mergers and acquisitions activity than that implicit in the literature, which generally over samples larger, deals involving public firms.

Table of Content

CHAPTER 1: INTRODUCTION6

CHAPTER 2: LITERATURE REVIEW7

Merger and acquisition7

Excess Capacity Theory8

Understanding Risks and returns after mergers9

CHAPTER 3: METHODOLOGY11

Acquisition Identification11

Calculating Cumulative Abnormal Returns12

Event Study12

SDC data13

Data screens14

Excess Capacity Measures14

CHAPTER 4: CONCLUSION15

REFERENCES16

Chapter 1: Introduction

Mergers can destroy shareholder value, because integrating merging firms can be costly, larger businesses can be more difficult to operate, and managers might overestimate the synergy between acquirers and targets and consequently overpay for the targets. The literature on M&A can best be described as thin. Kwansa (1994) analyzes stock price reaction to merger announcements between 1980 and 1990 for a sample of eighteen target firms and finds that targets earned significant positive returns at the announcements. Few studies thus far focus on acquiring firms' returns in M&A in the industry (Andrade, 2004, 66).

Experts report that both acquirers and targets achieve positive abnormal returns when they announce M&A transactions, and conclude that mergers in the lodging industry create value for both acquirer and target shareholders. Hsu and Jang (2007), however, find no significant abnormal returns for acquirers based on a more stringent sample of different companies. Yang, Qu, and Kim (2009) examine long-term abnormal returns for hospitality acquirers. A recurring theme in the research on M&As is that these transactions tend to occur in waves that cluster by industry. None of these studies includes unlisted target firms—targets that are privately held or subsidiaries of other firms. In this thesis, we will analyze the role of mergers and acquisitions in stock returns. For example, the finding that mergers take place in waves is attenuated with a greater occurrence of smaller and/or non-public organizations. Also, acquirers gain in most takeovers in spite of a threefold decline over the sample period in acquirer returns.

Chapter 2: Literature Review

Merger and acquisition

The term merger and acquisition ...